Lord Evans of Temple Guiting: My Lords, we can break down the costs into three distinct budgets: for the London Organising Committee to stage and run the Olympic Games £2 billion, paid for from private funds; for the development of the Olympic Park—the core Olympic costs—£3.3 billion, an increase of £900 million that the Secretary of State announced on 21 November; and what the Government decide to invest in regenerating the area.

Lord Evans of Temple Guiting: My Lords, there has been bad publicity, much of it caused by Jack Lemley, who went back to America and made a seriesof announcements that, to put it politely, were completely erroneous. At no time did he say that he was worried about mushrooming costs. He chaired the committee meeting in September at which engineers said that there was nothing in the soil on the Olympic site that they had not anticipated. I believe that a lot of the press comment is centred on the interview that Mr Lemley gave in America. We are now ready to present to the world that the fact that we are having the Olympics here is one of the greatest achievements in recent sporting history.

Baroness Oppenheim-Barnes: My Lords, the noble Lord said that this will be a great achievement to show the world. The people of this country are going to be paying for it—whether or not they wanted itor whether or not they think that it is grand achievement—and it has certain odours of the Dome about it. Will he make a presentation about it to the people of this country, rather than just the world?

Lord Soulsby of Swaffham Prior: My Lords, I thank the Minister for his reply. I hope he brings a bit of Christmas cheer to the people who have been awaiting their payment since 2005. By comparison, under the devolved Administration in Scotland,70 per cent of farmers will receive their 2006 payment by Christmas this year. I am aware that the devolved Administrations have a different payment scheme; however, in Germany, which has a similar system to England's, farmers expect a full payment by the end of December this year. If Germany can do it, why can't we?

Lord Rooker: My Lords, I would like to. Of the480 claims for which a full payment is due—in other words, for which nothing has been paid—the top10 in terms of monetary value all relate to probate cases. I cannot go beyond that. That is no differentfrom what would have happened under the oldIACS payment system. The claims are incredibly complicated, but I cannot give a monetary value. The top-up claims would constitute approximately 20 per cent of the total claim, it being 80 per cent of the initial payment.

Lord Rooker: My Lords, it would be impossibleto work that out. The cash flow in the farming industry is partly affected by single payments, but it is affected by a lot of other issues. We have paid out £1.519 billion. We paid out the claims within 1 per cent of the legal limit by 30 June. We were required to pay out 96.15 per cent of the money; we have paid out around 94.9 per cent. Everybody knew that the window was from 1 December to 30 June. I agree that farmers were promised the money earlier, and we failed on that. However, we met our legal obligations, and we are paying interest on the claims not met by30 June.

Lord Rooker: My Lords, on the latter part of the noble Baroness's question, there is no doubt but that climate change will have a dramatic impact. I understand that only a slight change in temperature—maybe one degree or less—is required, particularly in the North Sea and the Irish Sea, and, before we know it, the fish stocks that we are used to having will have disappeared. It maybe that they will have gone elsewhere, but the fact is that there will be a massive change if sea temperatures change dramatically. Half a degree to one degree is a dramatic change in temperature. So there is certainly a climate change impact on this.
	On what we are trying to do with the European Union, the environment council and the fisheries council are meeting this week in Brussels, as the noble Baroness and the House will be aware. The fishing Minister is there. The European Commission recently published a proposal for the regulation that will set total allowable catches and quotas for 2007. Given the poor status of some of the key stocks, it is likely to be a significant challenge to deliver the necessary stock recovery while ensuring the viability of the UK fleet. As far as possible, we will be guided by scientific advice—we have to be guided by it—but we have to balance that with ensuring that we maintain a viable UK fishing fleet.

Baroness Miller of Chilthorne Domer: My Lords, earlier this year the Minister increased the minimum landing size for sea bass from 36 to 40 centimetres. He also increased the mesh size, so that fewer juvenile fish were caught. Those were both sensible measures for preserving the stock. But does that rule, which applies to UK fishermen, apply to all nationalities fishing in UK waters? The commercial fishermen down in the south-west are concerned, because they believe that the rule does not apply to other people fishing inUK waters, who are able to land fish of the old size of 36 centimetres, thereby undermining the Minister's decision.

Lord Adonis: My Lords, I am not accountable to the House for decisions taken by the county council about the allocation of its own education budget. The resources available for education from central Government to the county council have been rising substantially in real terms, year on year. It is up to county councils, which are democratically accountable to their electors, what decisions they take about allocating resources to school transport as against other priorities within their revenue budgets. I stress that their revenue budget has been rising substantially, so that is an issue for them. I stress that no cuts are being forced on them by central Government.
	The noble Lord is quite right: the capital for school buildings has risen dramatically in recent years. In 1997, the entire capital budget for schools was£693 million. This year, it is £6.4 billion and, by 2010, it will be £8 billion. There is no area of our public infrastructure on which this Government have a prouder record than our investment in school buildings.

Lord Bridges: I much regret that I was unable to be present when the Bill was given its Second Reading last week. The issues that need attention were addressed by Mr Balls, the Economic Secretary, in another place on 28 November and by the noble Lord, Lord McKenzie of Luton, in this House on 11 December. The Economic Secretary said very clearly that ownership of the Stock Exchange was not a cause for concern, but that a change of ownership should not affect the existing regulatory regime. I heartily agree with that view, but unfortunately it was not included in the text of the Bill as it now stands. Instead, the Bill confers powers on the regulator—the FSA—to disallow excessive regulatory provision. The sole purpose of my amendment is to remedy the omission—namely, the reassurance regarding the change of ownership, which should, I think, be a feature of the Bill. I have no other significant objective in view.
	The Bill focuses on the legal basis of the authority's power to disallow excessive regulation. The neutrality of the Government on the ownership issue is not referred to. That is unfortunate, as it describes the authority's existing powers to intervene and extends to five pages of complicated provisions on the way in which enforcement could be rendered more effective. How is that to be done if the owner of the exchange objects? Would the authority be obliged to bring proceedings in the English courts or in the European Court? The space devoted to the legal niceties in the Bill seems to be excessive and likely to provoke further anxious inquiries from the new owner. The key issue is the vexed question of international jurisdiction, which is always a difficult matter in our relations with the United States, as several noble Lords pointed out at Second Reading.
	I should briefly explain my interest in this subject. For four years, from 1976 to 1979, I was the Minister (Commercial) at the Washington embassy. After retirement from the public service, I was a non-executive director of the then SFA—an association at that time—and a member of its disciplinary committee. The American attitude to jurisdiction is very different from our own. Noble Lords may know that the IRS, the American equivalent of the Inland Revenue, taxes the revenue of its citizens resident abroad as a matter of course. In addition, the US authorities permitted American Airlines to breach our bilateral aviation treaty for several years by allowing it to have direct routes from London Heathrow Airport to European destinations. This was certainly extraterritoriality with a vengeance. We had to give legal notice of the termination of the treaty to obtain a fair and legal deal for our airlines.
	I could give other examples, and we could all recall, as some noble Lords did in Committee on another Bill, the recent problems with our bilateral treaty on extradition. My point is simply that the US has regularly extended its international legal reach to promote its perceived national interests. International jurisdiction is thus an active and sensitive subject in the USA; it is a far more important issue there than it is here. We should do nothing to stir this hornets' nest, which I fear the Bill risks doing in its existing form.
	The long passages in the Bill making excessive and heavy-handed references to existing law are rather unfortunate and have no direct effect on international legal enforcement. If no one has questioned the validity of the various laws that are cited in the Bill, why do we need to list them now? If it is thought necessary to list them, they should be in a separate annexe with the Explanatory Notes, which are already to be treated in the same way, instead of in the body of the Bill.
	I thank the Minister for his kindness in discussing some of these matters with me on the telephone last week. At one point late last Thursday, he persuaded me to abandon the amendment but, after a sleepless night, I decided that my first instincts were right.He also expressed unease that my amendment, if accepted, might delay the passage of the legislation. But if speed is essential, why has it taken so long to prepare the Bill? Several people, including me, foresaw this difficulty some weeks ago. I cannot believe that it would cause concern if we were to delay this matter for some days or even a few weeks longer, given the very clear policy statements courageously made by Ministers about the acceptance of foreign ownership.
	All these difficulties could be overcome by accepting my amendment or another amendment on similar lines. Will the Government please decide to defer progress on the Bill until they have examined afresh the issues that I have mentioned this afternoon? The Bill does not strike the right balance in its present form. I beg to move.

Lord McKenzie of Luton: I sympathise with at least part of the intention behind the amendment, which I think is to put on record our determination to resist extraterritorial encroachments on our ability to regulate UK markets in accordance with UK and EC law. In doing so, I acknowledge the expertise of the noble Lord, Lord Bridges, on the international scene, and I am sorry if I gave him a sleepless night on Thursday. Let me stress that the Government have no difficulty resisting extraterritorial encroachments. Indeed, I hope that that was made clear in my Second Reading opening speech and by my honourable friend the Economic Secretary to the Treasury in his Second Reading opening speech in the other place, in which he said that,
	"our interest in the ownership of the London Stock Exchange is that it should not affect the existing regulatory regime under which the exchange and its members and issuers operate. Weare determined to act to protect our domestic regulatory environment, founded in both UK law and EC directives, that has made the City a magnet for international business. If a company operates in London, it should be regulated in London".—[Official Report, Commons, 28/11/06; col. 990.]
	However, we would not wish to accept this amendment today for both handling and substantive reasons. On the substance, the amendment would detract from the clarity of the Bill and would introduce an element of protectionism. While it leaves the existing processes in the Bill untouched, it adds a requirement that, if it were to have any effect, would make it impossible for the operation of the markets operated in the UK by recognised investment exchanges to be moved to another country. That could be the state in which the new owner is established or indeed any other state.
	A UK-recognised body does not cease to be a UK-recognised body if control of it passes to a foreign person. Provided that it continues to carry on activities regulated under the Financial Services and Markets Act by way of business in the United Kingdom after the change of ownership, the exchange or clearing house concerned will still need to be either an authorised person under the Act or exempt from the need for that authorisation by being a recognised body. In both cases, it remains subject to the Act's requirements and to the relevant provisions in EC law. It will still be supervised by the Financial Services Authority. There is no question of supervisory responsibility passing to a foreign regulator and there never has been. LIFFE, which is owned by the Dutch company Euronext NV, NYMEX Europe and ICE Futures, which are owned by US parents, and Virt-X, which is owned by a Swiss parent, are still supervised by the FSA and have to comply with the same FSMA requirements as the London Stock Exchange and the London Metal Exchange.
	If a UK-recognised body carries on activities in another country that are regulated in that country, it will have to comply with that country's law. That would include, of course, complying with the conditions for a "passport" under the relevant EC directives if it wished to carry on such activities in another EU member state.
	There will be no more opportunity for the SEC or any other foreign regulator or authority to commence proceedings against a UK-recognised body after a change of ownership than there is now—or against a member firm of the recognised body, against an issuer whose securities are quoted on that body or against any other person, such as the directors or employees of recognised bodies, member firms or issuers. We cannot stop the authorities in any foreign country taking action against its own citizens or residents in its own courts; we have never been able to do that and will never be able to do so. But the Bill will give them the defence of being prevented by local, UK law, from carrying out the foreign regulator's wishes.
	There is no need to legislate against any attempt by a US or other foreign regulatory authority to impose its provisions directly on a UK recognised body. The Protection of Trading Interests Act 1980 and the corresponding EC Council regulation are designed to protect Community interests by making it illegal for individuals and companies to comply with extraterritorial demands by US or other overseas authorities. Under that legislation, UK companies are obliged to inform the Government and the European Commission of any extraterritorial action taken against them in order that appropriate protective measures can be taken. Those measures make it unlawful for persons in the UK and the EU to comply with the requirements of the foreign legislation, regulator or court. None of this will happen on account of the Bill; it is simply a consequence of how the existing law works. The amendment is not therefore needed to make that point clear or to put it beyond doubt.
	The Bill is directed at a different problem. Its purpose is to prevent foreign-owned bodies from applying regulatory schemes from other states that would be excessive when considered against the existing UK and EC regulatory framework. It is possible that the foreign owners of a UK-recognised body might wish to do this for commercial reasons. It is more likely, however, that the regulatory authorities or Government in their home country would attempt to force the hand of the foreign owners by passing legislation or taking enforcement action under existing legislation in that home country. The Bill's provisions will prevent such actions from resulting in unwelcome changes to the operation of UK-recognised bodies and the markets and systems that they run by giving the FSA a right to veto excessive regulatory provision proposed by UK-recognised bodies irrespective of their ownership or whether there has been a change of ownership.
	We also have concerns about how the amendment would work. The issue raised here is similar to issues that were raised in the other place when probing amendments were tabled. The Government believe that limiting the Bill's provisions so that they took effect only after a change of control of a UK-recognised body or after a foreign takeover would be undesirable. Equally, the Government recognise that, if an owner of a recognised body wants to operate in a completely different way and seeks to move the domicile of the body to enable him to do so, then that is his right in a world of free markets. Attempting to prevent such steps would be unworkable, discriminatory and unfair. It is unlikely that any regime along these lines would be compatible with the UK's obligations under the EC treaty or under the World Trade Organisation's general agreement on trading services.
	Any new owner would also be taking an enormous business risk in seeking to move the centre of operations and the legal domicile of the exchange to another state, which is the only way in which overseas regulatory authorities would be able to take on any regulatory function in respect of any of the existing UK markets or the exchanges that operate them. In other words, the exchange would have to cease to be a UK exchange. Exchanges cannot force issuers or member firms to follow them if they migrate. Issuers and member firms are ultimately just users of the facilities that the exchange provides on a commercial basis. They are customers who can go elsewhere.
	The Government do not want to send out the message that the UK does not welcome foreign owners or foreign investment in the financial services sector. I am sure that few Members of the House would wish to send that message out either. My honourable friend the Economic Secretary said in another place:
	"Such intervention"—
	he meant protecting the London Stock Exchange from foreign ownership—
	"would fly in the face of the traditions that have underpinned the City's success over the past 20 years. A policy of protecting 'national champions' would damage, not bolster, the interests of London and the UK".—[Official Report, Commons, 28/11/06; col. 989.]
	As to the handling reasons to which I referred earlier, if we amend the Bill now it will have to go back to the other place and its passage would be delayed. NASDAQ's bid for the London Stock Exchange is on the table. It is important, therefore, as I said in my Second Reading speech, that we move quickly. I do not accept the contention of the noble Lord that the Bill has been a long time in coming. Once it was identified as an issue to take forward, the Government moved swiftly. I am grateful for the support that we have had from the Opposition Benches. Correspondingly, I must oppose the amendment.

Lord Wedderburn of Charlton: Perhaps I may ask the Minister a question. I do not pretend to be an expert in this highly complicated field but I am aware of what I have heard from experts outside the discussions of the House and of what I took from the noble Lord, Lord Bridges, in moving the amendment. He asked the Minister whether it would be possible for Members of the House, with their advisers, to consider the highly important and, if I may say so with great credit to him, extraordinarily complex statement that hehas made—which, after all, envisages questions of extraterritoriality, foreign legal systems and European Union law, which I have also heard experts discuss—and the Minister's very important reply to the amendment again after Christmas, when, no doubt, they and their advisers will be in a mellow mood from a happy period of recess.

Lord Bridges: I am very grateful to the Minister for his explanation. It does not seem to me, however,to dispose of the problem. I fear that there is, at the end of these arguments, inevitably a conflict of jurisdictions and I fear that this may be one of the consequences of the Bill. But I have listened carefully to what he has said and I will have the opportunity of reading it afterwards. As no other Lords have spoken, I do not propose to press this matter at this stage. But I think that we may have to come back to these issues, because they will not go away. I beg leave to withdraw the amendment.

Pre-Budget Report 2006

Lord McKenzie of Luton: My Lords, I welcome this opportunity to debate the information provided to the European Commission under Section 5 of the European Communities (Amendment) Act 1993. Each year the Government report information to the Commission on the economic and budgetary position and our main economic policy measures, and each year we aim to ensure that each member state's economic policies are consistent with the goals of the treaty. That includes non-inflationary economic growth, high levels of employment and social protection and better living standards for citizens in the UK and across the EU. These goals are consistent with the Government's approach to economic policy to maintain long-term stability. The Government's monetary policy framework seeks to ensure low and stable inflation, while fiscal policy ensures sound public finances over the medium term.
	Section 5 of the European Communities (Amendment) Act 1993—or the Maastricht Act, as it is better known—requires Parliament to approve the information sent by the Government to the Commission for this purpose. We set out such economic information in the Pre-Budget Report earlier this month, and this material forms the basis of what we send through to the Commission. It is this assessment, set out in the PRB, for which approval is sought today. By formally sharing information from the Pre-Budget Report with our European partners, we can help ensure a proper, accurate and effective EU system, contributing to enhanced employment and growth.
	The background for debate on the economic position is the need to address the great global challenges ahead. Asia is already out-producing Europe; China alone is manufacturing half the world's computers, half the world's clothes and more than half the world's digital electronics. But in the next 10 years, the competitive challenge is even more profound. Once responsible for just one-eighth of the world's growth, China and India will soon capture almost half. So economies like ours have no choice but to out-innovate and out-perform competitors by the excellence of our science and education, the quality of our infrastructure and environment and our flexibility, creativity and entrepreneurship.
	Just as in the last decade by planning long term we created a new and enduring British framework for economic stability, so, too, for the coming decade the task is to think long term again and create a new framework for investment and innovation, a strategy to make the next stage of globalisation work for the British people.
	To put this challenge in context, we should lookat some of the global developments and trends inthe past year: global imbalances, exchange rate uncertainties, stalled trade talks and high commodity prices. Against this backdrop, growth this year is expected to be 2.75 per cent, rising to 2.75 per cent to 3.25 per cent next year. The UK is experiencing its longest unbroken expansion on record, with GDP having grown for 57 consecutive quarters. By mid-1997 we expect inflation to be at its 2 per cent target and remain at target in 2008. Productivity, which in the last economic cycle up to 1997 grew by 1.9 per cent, is averaging 2.4 per cent since 1997. This year alone there are 200,000 more people in employment; there are 2.5 million more jobs than in 1997, the highest ever number of men and women in work in our country, and employment is higher in every region and nation since 1997. Over the past 35 years, employment has risen by 17.8 per cent. Well over half of that rise has occurred under this Government. Taken together, the UK is currently experiencing the longest period of sustained productivity and employment growth since the 1950s, when records began.
	This performance is the direct result of the monetary and fiscal policy framework we have introduced. We will continue to maintain fiscal discipline; I am sure that all Members of this House would expect no less.
	Our two fiscal rules are the golden rule that current spending should be paid for by current revenues, not borrowing, and the sustainable investment rule that debt is held at a prudent and stable level over the economic cycle. In the Pre-Budget Report, the Chancellor announced that we are meeting both rules. With an overall surplus of £8 billion in this economic cycle, we are meeting the golden rule, and are already on course to meet it in the next.
	While net debt is 47 per cent of national income in the USA, 55 per cent in the euro-area and 90 per cent in Japan, in the UK it stands at 37.5 per cent. With debt lower than our competitors, Britain is also meeting the sustainable investment rule, and at the same time it has tackled the historic under-investment in our infrastructure and doubled capital investment in health, education and transport.
	Alongside each Pre-Budget Report that we publish, we publish a long-term public finance report, providing a comprehensive analysis of long-term socio-economic and demographic developments, and their likely impact on the public finances. Even taking into account our new commitments on pensions, it showed that the country's public finances are also on a sound and sustainable basis for the long-term.
	Within this strong and sustainable fiscal position we are therefore well placed to make decisions about our long-term priorities. As recently as the mid 1990s, 75 per cent of all new public spending went to debt interest and social security benefits. Today it is down to less than 20 per cent. And the purpose of all these savings is to ensure that front-line services will have the resources they need.
	So up against the global challenge and with fiscal rules that allow us to borrow for sustainable investment we should not postpone or avoid essential new investment in infrastructure and education.
	Capital investment in education stood at only£1.5 billion in 1997; it will be £8.3 billion next year and we will set out long-term plans for investment to rise further over the next decade. Investment in transport—just £4 billion in 1997—will be £9.6 billion next year and in the Comprehensive Spending Review we will set out an updated 10-year spending plan; and investment in housing, which was just £2 billion in 1997, will be nearly £8 billion next year, with sustained investment in the next spending round.
	In an increasingly integrated and competitive global economy, raising UK productivity is critical to delivering continued economic growth and sustained increases in standards of living. Raising productivity requires the openness and flexibility to seize new opportunities in the global economy, while making the essential long-term investments needed to support business growth—including vital infrastructure and skills.
	The Leitch report says that instead of today's6 million unskilled workers, the 2020 economy will need only half a million unskilled workers and that instead of 9 million high skilled workers and graduates today we will need 14 million.
	The Government want British workers to gain the skills for these higher-paid jobs of the future. So our aim by 2020 is to have 90 per cent of adults reaching at least the equivalent of 5 GCSEs—achieving in just over one decade an ambition that no other country has yet managed; by reforming underperforming colleges, doubling from 2 million to 4 million the number of adults achieving A-level equivalent skills; and ensuring that our economy has over 5 million more men and women with high level professional and graduate skills.
	In addition, the Secretary for Education has also appointed Sir Digby Jones to advance an agenda of: employees taking more responsibility to train; employers taking more responsibility to offer time off with, in return, more say over what training is provided; and Government taking more responsibility to reform and invest in training provision at work, in colleges and online.
	We are determined that Britain will be a world-class location for future medical research, including stem cell. So that Britain leads the world in developing new treatments and new drugs, we will bring together the research capability of our universities, institutes and pharmaceutical companies with the unique resources of the NHS.
	I can confirm that with a pooled budget of over£1 billion a year and a new fast-track procedure for priority research, the president of the Academy of Medical Sciences, Professor John Bell, will lead this new drive to identify for Britain the most useful and fruitful areas for potential medical breakthroughs.
	Twenty-five years ago the market value of our top companies was no more than the value of just their physical assets. Today the market value of Britain's top companies is five times their physical assets, demonstrating the economic power of knowledge, ideas and innovation.
	The Gowers review has set out reforms to ensure that the UK's intellectual property system is fit for the 21st century and able to capitalise on innovation,and the Government have welcomed all the recommendations that that review has made to them. The next challenge for Britain is to match strength in basic research with success all round in transforming knowledge into successful products and new jobs. Therefore the Government will, from 2007-08, award universities an extra £60 million of quality-related funding.
	The planning system is fundamental to the contribution of sustainable development and employment to economic growth. The Government will take full account of the Barker review of land use planning, which recommends improvements to streamline the planning application process and reduce the burden on business, and that a test of economic benefit be factored into planning considerations. The same partnership of responsible individuals, companies and Governments is vital to meeting the environmental challenge. A key component of that is to use market mechanisms and incentives to work towards global carbon trading. Following the Stern review, 31 countries in the EU and EFTA have already signed up to emissions trading as the first step to this global framework. We are bringing together the major financial institutions, our being aim to make London the world's leading centre for carbon trading.
	Our task is to meet and master the global economic challenge, making critical decisions to secure Britain's long-term economic future. The Pre-Budget Report drives forward the great economic mission of our time: to meet the global challenge and unleash the potential of all British people so that the British economy outperforms our competitors, and to deliver security, prosperity and fairness for all. That is the programme set out in the 2006 Pre-Budget Report, and, with the approval of the House, is the basis on which we will send updated information to the European Commission.
	We are fulfilling our commitment, under the Maastricht Act, to report on our main economic policy measures, and maintaining our position, developed by this Government, at the heart of the EU policy process. I welcome the debate we are about to have on this issue. I beg to move.
	Moved, That this House takes note with approval of the Government's assessment as set out in the Pre-Budget Report 2006 for the purposes of Section 5 of the European Communities (Amendment) Act 1993.—(Lord McKenzie of Luton.)

Lord MacGregor of Pulham Market: My Lords, this is the second time in a week that I have unexpectedly followed the Minister. I will again choose specific topics rather than try to comprehensively cover the field. I used to be what might be described as a Budget and pre-Budget nerd or weirdo, in that, following my time in the Treasury, when I used to be intimate with all the documents, I gave myself the challenge of reading the Budget Statement and many other documents before midnight at the end of the day they were published.
	I have long since ceased to be such a nerd or weirdo. One of the reasons is that the endless detail in the PBR needs to be put in context. I suspect that it washes over everyone else in the same way as it does over me. For example, I do not believe the "golden rules" are now given much credibility; the dates of the cycle have clearly been shifted to make those rules fit, and we know that substantial elements of what used to be known as "government borrowing", which would include Network Rail and the ever-accumulating off-balance-sheet financing of the PFIs, are not included under the golden rules.
	I have to admit that as I listen to the relentless, grinding recital of statistics from the Chancellor as he makes his Budget Statement, it now induces sleep or the mind wanders elsewhere—particularly as I realise that he is often repeating figures he has given earlier so that he can present them as new. The Institutefor Fiscal Studies, for example, said that, of the£36 billion education budget that he announced, only £100 million was actually new. As we know, he very often gives five-year figures to make them look larger.
	I shall make one or two observations on the macroeconomic scene before I come to two specific topics, where I hope to support the Government's approach and offer some constructive suggestions. I shall start with government spending, on which the Minister has spent so much of his time. I am concerned that, having got it to realistic levels as a proportion of GDP in the late 1980s, and again in the late 1990s, government spending is becoming an increasing proportion of GDP again. It is still too high, although there is a noticeable and inevitable slowdown in the figures ahead.
	I accept that, between 1997 and 2000, the Government were prudent in their spending, but since 2000 they have been all too inclined to throw money at everything in the belief that it will achieve results. Since 2000, spending in nominal terms has risen by an average of7 per cent per year, well in excess of economic growth, and without questioning value for money. I think Iam right in saying that the Government have now spent £7 billion on consultants. Much money has been wasted—my noble friend Lord James could give many examples of that—some of it through sheer government incompetence, such as the very large sum that we are now paying in EU fines for errors connected with the Rural Payments Agency, or simply through the Government not achieving the results that they had hoped because they have not introduced appropriate reforms, as in the NHS.
	The result is that taxes are now too high. Theyhave risen substantially in the corporate sector, at a time when many of our competitors are reducing corporation tax to rates well below ours. We were not in that situation a few years ago: indeed, the opposite applied. Our taxes are too high for individuals. As the Governor of the Bank of England recently pointed out, the increased taxation for individuals is one of the contributory factors to the squeeze on spending which we can now anticipate. The Chancellor has run out of ideas for stealth taxes, but he must find scope for reducing the burden of taxation and regulations and for simplifying them. It is significant that Tolley's tax handbook was 4,555 pages long in 1997—one might well have considered that too many—and it now has 9,841. There is no sign of any of these matters in this year's Pre-Budget Report.
	It is interesting that, in each of the past three years, the level of borrowing anticipated in the PBR, and the actual outcome, was a good deal higher than predicted in the Budget of that year. We are now seeing substantial increases this year. I grant that the low inflation has certainly been a success so far, but there are signs of upward creep. The latest Bank of England inflation report in November concluded:
	"Overall the risks to growth and inflation are judged to be broadly balanced though as in August there is greater than usual uncertainty over the outlook for inflation".
	I often wonder about the extent to which our low inflation has been assisted by two key factors. I would like to see a proper analysis of this. The Minister referred to competition from China, India and other developing countries. The reduced price of many imported products that are key ingredients of everyone's spending has been a major contributory factor in keeping inflation low. I notice that the Bank of England's latest quarterly bulletin, in referring to this factor without quantifying it, said that that beneficial tailwind had waned somewhat in the past couple of years. If that beneficial impact falls from its present level, and even reverses, we could see an upward pressure on inflation.
	Equally, immigrant workers, particularly from former Soviet Union territories now in the EU, have contributed substantially to keeping pay levels low in certain parts of the country, especially in the south-east and even in East Anglia, and to keeping that area of inflation under control. I sometimes wonder whether our economy is not benefiting from the productivity improvements of other countries and of immigrants to this country. That may not last.
	That leads me to what I think is one of the greatest concerns of all. Productivity is one of our biggest worries. Our productivity growth has fallen. In 1992-97, productivity improvement was 2.6 per cent a year. It was 2.1 per cent a year between 1997 and 2001—already declining. Since 2001 it has been a mere 1.5 per cent a year. It is no wonder that the World Economic Forum shows us falling from seventh place in 1997 to 13th place in 2005 in terms of competitive conditions. That is an extremely worrying trend.
	On the macroeconomic situation, we have seen enormous and significant contributions to growth and the feel-good factor from the City of London and from financial and various other services. That is certainly reflected in City bonuses at the moment. Indeed, the Bill, to which we have just given Report clearance and which the Minister knows I wholly support, is designed entirely to ensure that we remain predominantly the leading financial centre in the world. I wonder whether to some extent the feel-good factor prevalent in London is contributed to by, on the one hand, the success of the City, the substantial bonuses and wealthy people coming here and, on the other, the contribution of other immigrants to keeping the costs of services low. I wonder whether that feel-good factor extends as much to the rest of the country.
	I want briefly to share a concern to which I hope we can return on another occasion. There are increasing warnings on the level of highly leveraged debt backing European companies, the majority of which is held by private equity-owned businesses. In the past two weeks, there have been three warnings. The first was from Sir John Gieve, Deputy Governor of the Bank of England, on the danger that hedge funds and equity groups are over-borrowing. Secondly, Standard & Poor's drew attention to the fact that the average debt-payment burden of outstanding leveraged buy-out deals is now four times above the normal safe level. Thirdly, today a private equity professional has drawn attention to the fact that debt-driven private equity houses face a tenfold increase in corporate defaults, which, he believes, will come soon. While this is a subject for later debate, if some of those warnings come true, the financial sector will face a very different situation.
	I now turn to two topics on which I wish to be constructive. First, the Eddington report contained two key findings that are highly related to what I said about growth and productivity. One finding was that,
	"in mature economies with well-developed transport networks it is transport constraints that are most likely to impact upon a nation's productivity and competitiveness".
	Another states:
	"Eliminating existing congestion on the road network would be worth some £7-8 billion of GDP per annum".
	As a former Secretary of State for Transport I strongly support the report's recommendations on road pricing. I could not do otherwise, because in May 1993 I published a document, Paying for Better Motorways, which, if I may say so, covered all the arguments much more succinctly than the Eddington report and others that I have seen, but the arguments were compelling. My own concern was that one of my officials suggested that motorway tolls should be known as motorway access charges, or "macs", in the same way as teacher training days in schools became known as "Baker days". I was not sure that I wanted to be associated with motorway charging in quite that way, but we set out all the arguments in our report. I wish to make three points.
	First, I regret the lack of progress since then. We have lacked political courage, and I am concerned that the Eddington report talks about the introduction of road-pricing within the next 10 years. We cannot wait that long. I recognise that there is a technology requirement but, having looked at this matter carefully in 1993 and gone to the United States, Norway and elsewhere to do so, I think it is clear that the technology could have been developed in the 10 years since then. I hope that we can get on with it.
	Secondly, as with identity cards, in road-pricing the Government are destroying a good idea in principle by being over-complex, which could lead to excessive costs. It would be better to focus on motorways and not to try to be too sophisticated by introducing a sensitive road pricing system on many other roads in the UK. That, I believe, would also have a serious effect on rural areas. It can be done on motorways. I constantly have to make the point to people who live in urban areas, where there is alternative public transport, that there is no such alternative in rural areas. I do not see the need for road pricing in rural areas, where the congestion is not the same and alternative transport is not available.
	Thirdly—and I emphasise this—it is vital that we use the proceeds for motorway improvements. During the Prescott era, we saw a substantial decline in investment in roads infrastructure. We all know that there are demands for bypasses, and so on, and we will never be able to entertain them all in the short term. If we are to get motorway improvements at the same time as the advantages of motorway tolling, which can be adjusted according to times of congestion in different periods of the day, the proceeds of tolling must be hypothecated to the improvement of the motorways. In Paying for Better Motorways in 1993 we made precisely that point and gave a commitment that, if charging were introduced, it would provide another source of finance for improving roads. That is the only way that it can be made acceptable to the public.
	My final comments refer to the Barker report. I shall be brief but hope that we can return to the issue another time. It is impressive how the delays in the processes of our planning system lead to much higher costs for so many businesses and for our infrastructure generally. It is significant that that is one of the main obstacles foreseen by people who want to invest inwardly, and it is increasingly seen as a burden on businesses. I do not have time to go into the detail, but many improvements can be made in the process without diminishing the opportunities for democratic accountability and for the public tomake their views known. I very much hope thatthe Government will pursue with sufficient speed the appropriate recommendations on processes in the Barker report.

Lord Barnett: My Lords, I accept perfectly that Treasury forecasts are as likely to be wrong as right, like anybody else's economic forecasts. I noted that the Stern report said that making an economic forecast one year ahead is not always easy. He then proceeded to make one 50 years ahead, which I would assume he accepts is even more difficult. I gather the Treasury has denied that statement, but it does not matter.
	Certainly, Treasury forecasts from time to time are just as likely to be wrong as right, as the noble Lord, Lord Wakeham, and I both know from days in government. We do not need to get too excited about them, although I noted that the committee's witnesses from the Bank said that of course the decisions were taken on more and much bigger issues than just the Treasury forecasts. As I say, they are not so stupid as to rely solely on those forecasts.
	I want to raise a point about the Chancellor's current forecasts on economic growth, not those made in the past. It is forecast to be about 2.75 per cent this year, which most forecasters of all kinds apparently agree is likely. Next year, it will be 2.75 to 3.25 per cent, as my noble friend repeated today. Again, nobody has quite disputed that as yet, and it may well happen. However, the trend growth figure is probably even more important. We are now being told that the trend growth has gone up to 2.75 per cent—previously, it was 2.5 per cent.
	I confirm, sadly, that the Government and the Chancellor do not expect the 3.25 per cent that they might achieve next year to be sustainable. Indeed, 2008 is already forecast to be slightly lower, and it might be lower still in 2009, although inflation will continue at round about the 2 per cent target figure given to the Monetary Policy Committee. Will the Monetary Policy Committee then allow, if I may put it that way, a 2.75 per cent trend rate if it affects the achievement of the remit about the rate of inflation, being 2 per cent—or, rather, 1 per cent up or down?
	My impression has always been that the Governor worries more about writing a letter to the Chancellor than about his other remit, which is to considerthe Government's economic policies. He seems to be frightened to death of sending a letter to the Chancellor to say that we might have gone 1.1 per cent over the 2 per cent target. I do not know why he needs to worry in that way. He is obviously not worrying about what his policies on interest rates do to economic growth, which seems to me to be much more important. The remit could be changed to1.25 per cent above or below the target rate of 2 per cent.
	I said in a recent debate that I would not worry if inflation was slightly higher, as long as we had higher rates of sustainable growth. I was then accused of supporting high rate of inflation. I would certainly support 0.5 per cent more if that gave us a sustainable higher rate of economic growth. I have said this before, but I worry that the Monetary Policy Committee, the Bank of England and the Governor have clearly taken no account whatever of their remit that, "subject to that"—in those famous three words—they are supposed to look at what is happening to economic policy. They do not seem to be doing that at all.
	I hope that the Government and the Chancellor are as concerned about that as I am. I cannot see how we will be able to have a sustainable rate of growth higher than the average—I congratulate the Chancellor; I assume that no congratulations will come from the noble Baroness, Lady Noakes, but the past 10 years have seen an average of 2.5 per cent growth. We have never had that from any Chancellor before; we are entitled to congratulate him on that, and I certainly do.
	The question is: is it sustainable at that or even a higher rate? Of course, that depends to a considerable degree on improvements in the level of productivity, to which the noble Lord, Lord MacGregor, referred. He gave one or two reasons why productivity may or may not achieve the figures that we have had up to now.
	In the Pre-Budget Report, the Chancellor told us—again, we are talking of averages, which is a difficult thing to do in any forecast—that average productivity growth was 1.9 per cent before 1997 and, since then, has been 2.4 per cent. I do not know how the statisticians measure productivity rates, but I am as suspicious of them as I am of any other forecast. Even assuming they are right, that increase in productivity did not achieve a higher level of sustainable economic growth, which stayed at 2.5 per cent. I assume that it is accepted in the Treasury that it will not be able to sustain a higher rate of economic growth on average than 2.5 per cent, yet we are told that we have a trend growth rate of 2.75 per cent.
	Can my noble friend tell us how the 2.75 per cent trend rate was calculated? Under the Monetary Policy Committee's remit as it sees it—not as I would see it—I wonder whether it would allow a 2.75 per cent rate of growth while it is more concerned with having to write a letter to the Chancellor because we have gone more than 1 per cent above the target rate of inflation.
	I conclude—I have gone on too long so I had better conclude—by again congratulating my right honourable friend the Chancellor and looking forward to him doing even better as Prime Minister.

Lord Northbrook: My Lords, I much enjoyed the speech of the noble Lord, Lord Barnett, even though he was able to sneak in an extra minute while the Whip was away. My thoughts, for what they are worth—not being an economist—on the MPC's role are that I fear that its focus is on inflation at the expense of economic growth and perhaps its role should be more like the Federal Reserve which, as I understand it, has to take a more overall view of events.
	What should have been the Chancellor's last Pre-Budget Report was more interesting for its background of reviews rather than the rest of its content. The Leitch review on skills is a welcome contribution to the effort of improving the country's skill base. The Gowers review of intellectual property is a serious attempt to look at the complexities of the intellectual property system. The Barker review, following on her well written 2004 report on housing supply, contains valid criticisms of the current planning system, although her suggestion of the "son of development land tax" is unwelcome. The Gershon review has also been a major attempt to cut back on Civil Service costs and has achieved some successes. However, Treasury announcements of job cuts do not coincide with the ONS statistics. The Treasury stated in the 2006 Budget that 32,237 Civil Service posts had been cut since the original review. In contrast, the ONS stated that between the end of quarter one of 2004 and the end of quarter one of 2006, the reductions were only 10,000. Can the Minister explain the discrepancy?
	The other main positive factor to emerge fromthe Pre-Budget Report is that the Chancellor has increased his growth forecast to 2.75 per cent this year, which was well above his original prediction. I ask the same question as the noble Lord, Lord Barnett, on that. I reserve judgment on his decision to raise the growth forecast except to ask the Minister the justification for that. However, it is noticeable that the Chancellor, as the noble Lord, Lord Barnett, stated, downgraded his growth forecast for 2008 by 0.25 per cent.
	The Minister may feel that I shall only applaud the PBR, but I have some serious concerns about it. This is not just a case of opposition political criticism, but it is supported by an eminent independent think tank, the Institute for Fiscal Studies, which validates my case that while growth in the economy appears strong, public finances in recent years have been deteriorating. As my noble friend Lord MacGregor stated, the Chancellor has consistently had to revise his borrowing forecasts upwards since 2002. In 2003-04, the Government spent £8.5 billion more than forecast in the previous Budget; in 2004-05, the figure was £6.7 billion; and in 2005-06, it was £5.1 billion. In the 2006 PBR he has increased his future borrowing requirements to 2011 by £7 billion more than forecast in the last Budget. The IFS has also said that the Government have continually pushed forward the date that the current Budget, after adjusting for the cycle, would move back into surplus. That does not take into account, as my noble friend Lord MacGregor said, Network Rail and PFI initiatives of balance sheet spending.
	To compensate for the increased borrowing problem, the Government have taken various approaches. The first is to raise taxes. The Financial Times of 8 December contained an article in which the IFS pointed out that Gordon Brown has raised taxes by no less than £6 billion a year since the 2005 election, finally facing up to weaknesses in the public finances which could have been predicted. At the time of the last election, Gordon Brown said that there was no need to raise taxes to fund his existing expenditure plans, contrary to independent voices, ranging from the IFS to the International Monetary Fund. Robert Chote, the director of the IFS, has stated that tax increases in two Pre-Budget Reports and one Budget since the election were evidence that the Treasury now accepted that it had been wrong. He said that measures announced by the Chancellor would raise the tax take by £6 billion a year or on average£200 per family from 2008-09. According to the article, the Treasury has not questioned the IFS figures. Can the Minister confirm that?
	In the Pre-Budget Report, taxes have been increased again: first, there was a hike on fuel tax; and, secondly, the Chancellor has raised air passenger duty. Yet even in regard to that, he has decided to make the tax rise very complicated. He has, in effect, made the tax apply from when passengers fly, not exempting those who bought their tickets before the PBR if they fly after1 February. I can imagine the half-term chaos at airports after then.
	Tax-avoidance measures are expected to make the tax rise £2 billion in total. To disguise the fact that he has little room for extra government spending, the Chancellor has, not for the first time, taken to re-announcing government spending. As my noble friend Lord MacGregor has already stated, the IFS, in the same article of 8 December, accuses the Chancellor of misleading presentation in rolling many years of educational capital spending into one figure of £36 billion. Luke Sibieta, an IFS research economist, criticises the fact that the money for schools had already been announced in the previous Budget. The new money going to schools was very small and amounted to only £20 a pupil. What was big was old, he said, and what was new was small.
	Another ruse of the Chancellor has been his tampering with his self-imposed golden rule: that the Government should borrow only to invest over a full economic cycle. In his speech, the Chancellor not for the first time moved the end of the current economic cycle—this time, he moved it forward to 2007 rather than to 2008—allowing him to say that he will be £8 billion in surplus over the full cycle. The IFS has also criticised these changes, saying that the cycle has lengthened and shortened like a yo-yo. It recommended that the Government should leave the dating of the cycle to an independent body to avoid accusations of changes motivated by political calculations or, better still, should move away from measuring the state of public finances over a specific period. This moving around of the golden rule seems to have discredited it considerably.
	Another area of concern to which the Chancellor has not really referred in the PBR is inflation. The latest CPI and RPI figures were published on12 December. The CPI—the Chancellor's preferred measure of inflation—climbed by 2.7 per cent, up from the 2.4 per cent increase in the previous month. This is the fastest rate of increase since January 1997. This is the seventh consecutive month in which the CPI has been above the bank's target of 2 per cent. Independent commentators suggest that the MPC could remain in tightening mode on interest rates in the New Year. As a result, there is concern that higher headline prices could bolster consumers' inflation expectations, as reflected in a speech by Paul Tucker, the Bank of England's director for markets.
	A survey by the Recruitment and Employment Confederation and accountants KPMG showed that the rate of pay inflation for permanent jobs is running at its highest level for almost six years and at a 22-month high for temporary work. The study said that competition for talent against a background of rising demand for staff was pushing up wage bills. A series of recent high-profile private-sector wage settlements, such as the annual rises of at least 4 per cent won by thousands of workers at Ford, Rolls-Royce and National Air Traffic Services have suggested that annual wage demands are increasingly linked to the increases in the RPI rather than the CPI. The RPI, which includes interest payments on mortgages, climbed in the12 months to November by 3.9 per cent, up from 3.7 per cent in October. This is the highest reading since May 1998, according to the ONS. Does the Minister share my concern about the increase in inflation?
	As usual in Gordon Brown's Budget or Pre-Budget Reports, there was a sting in the tail in the small print. As with smaller companies' corporation tax, it involved the withdrawal of tax relief already introduced by the Chancellor. According to the Financial Times of 8 December, tens of thousands of people who had hoped to bequeath a substantial amount of their pension to their relatives have had their hopes dashed by a pre-Budget measure that could see more than 80 per cent of money inherited from pensions wiped out by taxes. Thus, the Chancellor has removed a freedom over personal pensions that he introduced only eight months ago.
	Under new rules introduced in April, those over75 could pass on their entire pension to their families, subject only to inheritance tax. In the Pre-Budget Report, however, Gordon Brown announced that, in addition to inheritance tax at 40 per cent, a new tax on death at,
	"up to 70 per cent",
	will be levied on these pots. Effectively, this measure forces many pension investors back into annuities, just a month after they won the freedom to avoid buying one from an insurance company once they reach the age of 75.
	As the shadow pensions Minister in the other place stated,
	"We are trying to bolster confidence in pensions. This seems likely to have the opposite effect.
	It is typical of Gordon Brown's mixture of confusion, complication and confiscation".
	Could the Minister ask the Chancellor to rethink this unfair change of law for personal pensions?
	Despite the commissioning of the Stern report, the IFS comments that the Pre-Budget Report was not that green, as already endorsed by the noble Lord, Lord Barnett. As the trustee of a new charity, I must declare an interest in this area. As the IFS states, fuel duty is by far the biggest green tax—it raises about2 per cent of gross domestic product. All other green taxes raise about 1 per cent collectively. Since 2000, the decision to allow the level of fuel duty to be whittled away by inflation has caused a big drop in green taxation. Even after the PBR rise of 1.25p a litre, fuel duties will still be 16 per cent lower after inflation than in 2000. If the Treasury were to restore fuel duties to their peak level, it would raise £4 billion for the Government. What does the Minister think of this idea—maybe cutting other taxes to make up for this increase? Interestingly, the IFS feels that the Government should tax air passenger duty per flight rather than per person.
	On the subject of additional taxation, I referred to the Barker report on planning, which I will examine in a little more detail.. Kate Barker recommended that Government should use tax measures to extract some of the windfall gain that accrues to landowners—I declare an interest as an owner of agricultural land—from the sale of land for residential development. She said:
	"Government should impose a planning-gain supplement on the granting of planning permission".
	I disagree with this policy. I believe in the Conservative Party view that we should oppose this plan for a new development land tax—a stealth taxon homes and urban renewal. High taxes on development will undermine regeneration and will inevitably be passed on in the form of higher prices for new homes. The proposals would undermine the housing market and discourage the provision of affordable housing to rent and buy.
	Additional taxation will not be revenue-neutral. It will encourage land-banking—namely, holding back land for development—which will mean less land for new homes. It has also been unsuccessful under a previous Labour Government, due to its complexity to implement. What is the state of play on this new development land tax? I understand that consultation may still be going on. For all the reasons above, I am unable to take note
	"with approval of the Government's assessment as set out in the Pre-Budget Report 2006 for the purposes of section 5 of European Communities (Amendment) Act 1993".

Lord Sheldon: My Lords, my noble friend Lord Barnett and the noble Lord, Lord Northbrook, spoke about the need to keep inflation within the set limits and not to have to write the very difficult letter to the Chancellor of the Exchequer. After 10 years' success in this area, I would have thought the Chancellor of the Exchequer might be reasonably relaxed about any small change that might occur in the months or years ahead. But this is his 10th and possibly final Pre-Budget Report that we will examine, and it is reasonable to look over the past 10 years.
	The most important decision that the Government and the Chancellor of the Exchequer took was to give power to the Bank of England, which resulted in greater stability and allowed incomes per head to rise by up to 60 per cent under this Government. Asmy noble friend on the Front Bench mentioned, the gross domestic product has expanded constantly for 57 consecutive quarters. The problem is that, as this has gone on for a dozen years, people forget how we have always had economic expansion followed by crisis. Not only do people forget the crises of the past, but young people never even knew them and do not realise what an impressive achievement this is. Meanwhile, the expansion continues this year, at 2.75 per cent against a Budget forecast in March of 2 to 2.75 per cent.
	The air passenger duty is set to rise from £5 to £10. It is important to stress in connection with any attempt to reduce emissions that we are responsible for only about 2 per cent of the world's emissions. We are a very minor player yet we pretend that these matters are so important that we can decide the future of the world's global warming. China produces new coal-fired power stations every week. It is quite likely that in this country we may actually benefit from global warming, which could make the south of England more like the Mediterranean and make Manchester more like the south of England. I do not think we need to give as much prominence to this matter as other countries, particularly those which will be more endangered.
	I have heard it suggested many times that the Atlantic current could be diverted by climate change. For the past 200 years that suggestion has been aired regularly and we are no nearer to a confirmation of it now than we were then. In our situation, we ought not to be at the forefront of countries pressing for climate control, but we could join in a general pressure for control. Meanwhile, the Revenue will benefit from the air passenger duty by about £1 billion in a full year, starting on 1 February.
	The other tax which has concerned me during the entire period of this Government is the maximum level of income tax, which is set at 40 per cent. The Chancellor of the Exchequer's scope for the whole of his Budget is severely limited every year by this decision, which was taken early in the life of the Government. At some stage I hope this will be looked at afresh. Forty per cent is not a very high level; in many countries it is much higher. Faced with some of the constraints that arise from time to time, there could be some adjustments there.
	The City of London is a great financial and international asset. This is valuable, but it is not enough. We cannot run the economy only on the City of London. We import goods and we must export goods. We cannot allow the loss of so many of our manufacturing skills to be dissipated. Our manufacturing industry was dominant in the 1850s, with half of our total exports coming from textiles alone. Then we increased the range of other industrial goods. Now we are becoming more reliant on higher technological products. The products of innovation and manufacturing expertise will increasingly provide our exports in the years to come. Specialisation, not the basic manufacturing from which we benefited so much in the past, will be the basis of our manufacturing industry.
	As the noble Lord, Lord McKenzie, pointed out, this is inevitable, as China and India, with their combined population of 2.5 billion, against our 60 million, and their large resource of labour from their agricultural areas, produce each year 2 to 3 million science and technological graduates. This is enormous. China's index of production rose from 2000 to January 2006 by 87 per cent. With all these graduates coming and taking on some of the basic industries that we thought were ours indefinitely, the situation will change. In 2005, growth in China was 8.4 per cent and in India 4.4 per cent.
	Meanwhile we have witnessed a steady decline in our manufacturing industry as a proportion of gross domestic product. We have a unique experience of macroeconomic stability. This helps productivity, as it makes planning easier. We have benefited from this macroeconomic stability of the past 10 years, for which the Chancellor of the Exchequer is wholly responsible.
	In the earlier years of technology, we were large producers of general manufactured products. Now that China is awake at last, we have to be more specialist. To do this, we have to increase our education and training programmes. The target for 90 per cent of adults to achieve the equivalent of five GCSEs by 2020 is rather exceptional. I understand the difficulty of the timetable but if we are really serious, should not more realistic and earlier targets be set? It would be splendid if 90 per cent of adults achieved that, but I would like to have seen an aim for a solution and progress rather earlier than 2020. In comparison with Germany, France and some other western countries, our skills levels are not very high. Although the Government stress the need to act in that regard, we must come to a conclusion about how our aims can be achieved.
	Meanwhile, the budget deficit is continuing and has to come to an end. Macroeconomic stability has helped productivity, since it enables companies more easily to plan for the future, and we have benefited from that.
	In 2004 the Chancellor of the Exchequer commissioned Sandy Leitch to identify the skills needed to maximise economic growth, productivity and social justice. The report was produced this month. On page 3, the Leitch review recommends that,
	"the UK commit to becoming a world leader in skills by 2020".
	I would like to see something more positive than just a statement that we will become the world leader in skills. It seems an objective that needs rather more thorough examination. The review goes on to say that the aim is for,
	"90 per cent of adults qualified to at least Level 2, an increase from 69 per cent in 2005. A commitment to go further and achieve 95 per cent as soon as possible".
	Level 2 is the academic equivalent of five GCSEs at grades A to C and a number of other qualifications. At present, more than 4 million people of working age in England have no qualifications at all and lack basic skills. The new skills envoy, Sir Digby Jones, a member of the national Learning and Skills Council, was appointed the day after the publication of the Leitch report. That shows some enthusiasm, which I am pleased to see. He told the Guardian Unlimited:
	"The job is to really push with the employers the need to skill their employees".
	I understand the importance that the Chancellor of the Exchequer gives to this; it is probably the most critical long-term issue in our objective of maintaining an important industrial base in this changing 21st century. To justify the Chancellor's expectations, many more of the details need to be set out. I look forward to seeing this in due course.

Lord Peston: My Lords, I draw your Lordships' attention to an article published in November on economic indicators on foreign direct investment in the UK. With free capital markets, there will be such flows in and out all the time. We are very much indebted to the noble and learned Lord, Lord Howe, for having the courage when he was Chancellor to remove external capital controls. The British economy has benefited from that move. For the firm, there will be benefits from capital diversification and potentially from productivity improvements. Increased competition of that kind may also lead to improvements in the wider economy.
	From our point of view, what is most interesting is the scale of recent inflows of this kind, which in 2005 were the largest in the world. We also have the largest level in Europe of these investments of such assets viewed as a stock. Worldwide, we are second only to the US. Equally, we have a large outflow and the second largest stock of overseas assets—again, second only to the US.
	One may argue about some aspects of the meaning of these capital flows in and out, but it clearly does not suggest remotely an economy in which serious foreign investors lack confidence—quite the contrary. I am a natural supporter of the Government, as are my noble friends Lord Barnett and Lord Sheldon, so your Lordships can leave us out, but the best evidence of the enormous success of our economy under the Government is the behaviour of foreign investors when it comes to investing here.
	On the economy, I shall not repeat at any length the remarks that I made in the debate on the gracious Speech. In essence, we have a successful and stable economy. That is also confirmed, as my noble friend Lord Barnett pointed out, by the independent forecasters, who have no debts or anything to get from the Government. They tell us that, on average, GDP growth is on its long-term trend; CPI inflation is returning to its target value; and public sector net borrowing is within the target range. Those are averages, and different forecasters will disagree, but the general position is satisfactory.
	On a related point, we continue to be bombarded by reports commissioned by the Government on how we can do better. From my rather cynical standpoint, these reports specialise in reinventing the wheeland stating the obvious. The noble Lord, Lord MacGregor gave us a very good example; I could give him another dozen, going back my whole life ever since I was an economics undergraduate. These reports uniformly fail to answer the basic question. Since nothing of what they say is original, why have the appropriate changes not occurred already? We are not discussing something that was thought of yesterday or the day before—these thoughts go back literally decades.
	I hope that I misheard the Minister, but I have a feeling that he announced yet another report from some independent body. I stand second to none in my regard for Sir Digby Jones. However, I can remember at least 45 years ago the National Economic Development Council going along exactly those lines and promising us all great improvements from more education, more training and so on. I do not want to put a damper on it, but we have heard all this before. To put it differently, I would rather have action than yet another set of reports.
	I turn now to the point raised by my noble friend Lord Sheldon. Again, I very much agree with him. The appropriate question is this. What should be our response to climate change? I do not doubt that climate change is occurring. I am not undermining the view of the natural scientists. The Governmentare right to emphasise the need for international co-ordinated action. But if you take my view—namely, that there is not going to be any international co-ordinated action—the central question is: what next? I agree that in many cases it is in our direct economic interest to promote the efficient use of energy. That is obvious. I have not had a chance today to check the figures, but I have a strong feeling that energy input per unit of GDP has been falling continuously for a great many years. It has fallen, both directly and indirectly, as a result of oil price rises, technological advance and, more generally, the market mechanism working to cause firms to economise in energy. As far as I know, it has not occurred as a result of government intervention. What we should not do is to place a burden on British industry—this is the point made by my noble friend Lord Sheldon—which our competitors are not placing on their industries.
	Perhaps I may also add the technical economic point. It may be optimal to use the tax system to raise the relative cost of some activities, such as those generating carbon emissions. But that does not imply that those tax revenues should add to the total tax burden and, therefore, be spendable. I agree with what the noble Lord, Lord MacGregor, said, in referring to this brilliant concept of motorway access charges, that it is right to have such charges to remove the distortions as a result of congestion, but that that does not tell you that those funds are then available for any purpose whatsoever. That requires a separate argument.
	I turn now to public expenditure and taxation. In broad terms, it seems to me that the public finances are in reasonably good condition. I agree that we can argue about the dating of the cycle over which the current budget is not in deficit. Your Lordships' Economic Affairs Committee said that the cycle should be decided by an independent body, as the noble Lord, Lord Northbrook, argued, and not by the Treasury. I stick to that view. But even if we take a different view from the Treasury and say that there has been a current budget deficit, that deficit would still be pretty small, even on the most anti-government approach, and at the same time the sustainable investment rule is being met. So I do not think that we need to get terribly hot under the collar about all of that.
	What is good is that it is now accepted and understood across the political spectrum that, in the medium to long term, public expenditure has to be paid for. In other words, a higher growth path for government expenditure, given the path of GDP, means either a lower growth path of consumer expenditure or lower investment. Therefore, if you want more expenditure on some things, you are bound to come up with the other point: on what do you want less expenditure? Perhaps I may say somewhat tartly that that applies to Trident as well as to many other things.
	I have two worries. The first is the question of efficiency gains, which my noble friend Lord Barnett has drawn to our attention. The Public Accounts Committee in the other place said in July that the announcements of efficiency gains have lacked analysis to support the claims that are being made, and it asked for more and better information. Iagree, as I think we all would. The Treasury claims that in 2006 efficiency gains have amounted to some £13 billion. I have searched the Pre-Budget Report in vain for precise details of how that calculation is done and what those gains are. I would like not only to know how the Treasury calculates them, but to see them spelled out by department.
	"Efficiency gain" means either getting more and better services for the same money or getting the same services for less expenditure. In some cases it is one, in some the other. As I say, though, I fail to see a full account of that in the Pre-Budget Report, and the ad hoc examples that are given—this department has done a bit of that, that department has done a bit of something else—are not what is required in a serious analysis of the problem.
	Thirty years ago, I was one of the first economists to become very unpopular in the Labour Party for arguing that it was at least as vital for the public sector as for the private sector to make efficiency a top priority. Indeed, I went further: since we were committed to the public sector, our responsibility was at least to insist that that sector became more efficient. That was not very much liked when I used to tell my friends on this side of the House that that was how we had to look at it. They thought that there was an easy way out.
	I would like to see, perhaps in the next Pre-Budget Report from a different Chancellor, a careful, serious account, department by department, of how the efficiency gains are occurring. I think that most noble Lords would agree with that. Wearing a very reactionary hat, I would prefer to see the gains made before the question of how we spend the resulting sums was determined, rather than that the gains were taken for granted and we were simply told how the money was going to be spent. I would not do that in my private life, and I certainly do not think that is how the Government ought to behave.
	My second and final worry is the PFI. Will my noble friend the Minister clarify the position—not necessarily in his wind-up speech, because we are all getting tired already, but perhaps by writing to us—concerning the payments and repayments over the long term of funds arising from the PFI? Is there a ticking time bomb, as some have alleged, regarding repayment in due course? The Pre-Budget Report refers to an assessment of the lifetime costs of both providing and maintaining the underlying assets and delivering the required level of service, or the running costs. I have to ask: are we confident that all those costs have been budgeted for and that the relevant bodies—at all levels, right down to hospitals and so on—are in a position to meet them? The more difficult question is: are we monitoring the PFI projects to determine whether, ex post facto, the gains that are claimed in terms of efficiency and cheaper finance have actually occurred and been advantageous to the public sector?
	I shall end as I began. This is unusual for me, because normally I believe that the main badge of honour of a serious economist is to take a totally black view of every topic, but I will say that, in my lifetime's experience, the economy is in as good shape as it has ever been. More to the point, it is in extremely good hands. I hope and expect it to stay that way.

Lord Newby: My Lords, this is the last time we will have an opportunity to discuss a Pre-Budget Report prepared by the current Chancellor, so it is a good time to assess how he has done on the macroeconomy and public finances, as well as on some of the specific issues raised by this year's Pre-Budget Report itself. On the macroeconomy, the Chancellor's decision on day one of this Government to adopt Liberal Democrat policy and make the Bank of England independent was the most important that he has made as Chancellor, as most noble Lords have said. It has worked well and more than any other single decision has given the stability and certainty of policy direction to keep inflation down and stimulate growth. Your Lordships' Select Committee on Economic Affairs has once again, in its report today, criticised the way in which the Chancellor makes appointments to the Monetary Policy Committee, which at its most charitable could be called eccentric, at least in the administrative procedures that are adopted. I absolutely agree with that, but despite that wrinkle in the system the MPC has clearly worked well.
	As far as the growth projections are concerned, for the next couple of years the Chancellor's projections look a bit on the high side, but as always the outcome will depend in large measure on growth in the US, where the picture is mildly discouraging, and in Europe, where it is mildly encouraging. The noble Lord, Lord Barnett, in particular, discussed why the Chancellor felt able to raise the trend rate of growth from 2.5 per cent to 2.75 per cent. I believe that the single biggest reason is the projected growth in the population, for which the single biggest reason is the large increase in net migration into the UK. In the past couple of years, we have seen possibly as many as 600,000 migrants coming into the UK from the former eastern bloc and elsewhere. Although that level is set to fall, all the projections show that net migration is set to remain relatively high, at over 150,000 per year, way into the future.
	In some respects, that is good news. In many industries and regions, migration has met labour shortages, both at the top end of the scale—I believe that 30 per cent of doctors in the UK were born outside the UK—and the bottom end of the scale, where almost one-fifth of those employed in the leisure services industry and tourism were born outside the UK. It has held wage growth in check, as the noble Lord, Lord Barnett, said. At the same time, however, an underlying weakness has enabled and encouraged that high level of migration to take place—the fact that there is still a large proportion of economically inactive adults. Of those people and those with low-skilled jobs, we find that some 20 per cent do not have the literacy and numeracy levels that we expect of 11 year-olds. It is a sad indictment of the Government, who have placed education absolutely at the forefront of their thinking, that they have fallen so far short of ensuring that all young adults have the basic tools of employability.
	It is equally depressing that during the Government's lifetime the number of young people studying the core disciplines of maths, science and modern languages has fallen in both relative and absolute terms despite the huge amount of extra funding that has gone into the education system. While I hope that the Government will be successful and that, by 2020, 90 per cent of adults will have the equivalent of five GSCE grades A to C, experience over the past 10 years suggests that, far from that being too far in the distance as a target, frankly it is a pipe dream on current policies. The Government missed a huge opportunity to tackle the problem by not accepting the Tomlinson report on vocational education. One hopes that they do not miss another opportunity by not implementing the Leitch report, which, as far as it goes, should be warmly welcomed.
	The Chancellor established the golden rule as the centrepiece of his strategy for public finances. It is just possible that the rule has had a restraining influence on the Chancellor's natural spending habits, but it now looks pretty threadbare, partly because it is constantly revised, which undermines credibility whether or not the revisions are right, and partly because there is a problem with a rule that looks at cycles of 10 years, as in most cases Governments do not neatly span 10-year cycles. If a Government coming in in years nine and 10 of a 10-year cycle were faced with the need severely to curb public expenditure just to meet the golden rule, would they do so? I think not. Therefore, the rule has serious flaws. If we really think that the rule is of fundamental importance—I am not sure that there is a consensus that it is as important as, say, the rule that underpins the MPC—the logical step would be, as the noble Lord, Lord Northbrook, said, to establish an independent body along the lines of the MPC to determine where we are on the cycle and to set limits on what the Government can spend on current expenditure in any year. I am not sure that Prime Minister Brown will be any keener on that than Chancellor Brown has been.
	I cannot, unfortunately, accept the rosy picture of the public finances painted by the noble Lord, Lord Sheldon, because in this year's PBR, as in last year's, and as in the Budget, we see taxes rise to fill a hole in the public finances. I shall come to the specifics in a moment, but the overall position is absolutely clear. In recent years, we have seen an unsustainable surge in spending, which will have to be severely reined in as soon as the Chancellor is safely out of No. 11. Nothing demonstrates this better than education, which we are told will be protected in next year's public spending round. The annual growth in schools' expenditure between 1997 and 2007 is 16.3 per cent. By comparison, for 2007-10 it is expected to be4.9 per cent. This is not a sensible approach. Stop-go spending on public services, even on a rising trend, is as inefficient and demoralising as it is for the entire economy. I suspect that the crunch on public spending will come in negotiations on public sector pay, in which the Chancellor appears committed to forcing through a real-terms pay cut. How ironic that this Chancellor, who has been so keen to court the unions to further his career up to this point, is set as Prime Minister to face a confrontation with them as one of his first challenges in that office.
	In addition, the Chancellor as Prime Minister will be faced with a number of open-ended public expenditure commitments—the continuing Afghan and Iraq wars; defence procurement contracts such as the Eurofighter and Trident; new nuclear power; and ID cards—none of which he seems keen to reverse. With these commitments, even if he is able to keep his pledges on education, the outlook for other key public spending commitments—on pensions, policing and hospitals, for example—looks pretty bleak.
	The major tax change in the PBR was, of course, the increase in air passenger duties as part of the Chancellor's plans to tackle climate change. However, the form of the air passenger duty is highly inefficient as a means of curbing aircraft greenhouse gases, because it takes no account of whether the aircraft is empty or full and it excludes freight altogether. It is very difficult to resist drawing the conclusion that this duty increase was a product of fiscal necessity, not of environmental concern.
	The noble Lord, Lord Barnett, discussed the concept of the green budget. I believe that the phrase was first used not in relation to the environment at all but to describe a provisional budget with a number of options for a full budget. This certainly is not a green budget, although the noble Lord, Lord Barnett, sets too high a bar on the potential effectiveness and value of green taxes. In my view, to be effective a tax increase does not have to completely destroy the activity that is being taxed. If green taxes on aircraft, for example, merely slow or stop growth in air travel, that would be a major achievement. One has to accept that taxes can have a valuable impact without totally destroying the activity on which they are imposed.
	The other environmental measures in the Pre-Budget Report are pitiful. The total financial consequence of all the other environmental announcements was£5 million in 2007-08 and literally zero in each of the following years. On the potentially vital issue of carbon capture and storage, the Chancellor announced a study to be undertaken with Norway. Frankly, we do not need further study; we need financial commitment to demonstration projects, in which power generation companies are champing at the bit to participate.
	When we discussed the Stern report during the debate on the Queen's Speech, and in today's debate, the noble Lords, Lord Barnett, Lord Sheldon and Lord Peston, raised the issue of whether we should be taking a lead on global warming. They pointed out that, given that the UK accounts for only a small proportion of total greenhouse gases, we could not make much difference, either directly or indirectly, in anything that we did, and that, therefore, we should not seek to take a lead. I have two points to make on that.
	First, since the Queen's Speech debate, I have had a number of conversations with representatives of major environmental players, including the former environment Minister of Brazil. It was clear to me that a lead taken by Britain would have an impact way beyond its immediate effects. The whole world knows that we must act on global warming, but it looks to the countries with the longest track record of environmental pollution—and we are the leaders in that field—to set a practical and moral lead.
	Secondly, I compare tackling global warming to tackling global poverty. The noble Lords who argued that we should not take a lead on global warming have, over the years, been keen supporters of UK funding for international development. Yet while there is a moral case for supporting action against both climate change and poverty, not least because broadly the same people suffer most—notably the poor in Africa and elsewhere—we will be afflicted much worse by global warming. As the noble Lord, Lord Hunt, pointed out, we are not just speaking of minor costs. He spoke about the inundation of Essex, which a number of noble Lords seemed to find mildly amusing. Perhaps the prospect of having to spend billions of pounds over a sustained period to stop the inundation of London will focus people's minds more clearly. Extreme poverty makes us uncomfortable, but extreme global warming would make us poor.
	My final thought on this Pre-Budget Report, as it wings its way to Brussels, is that this Chancellor has developed to an extraordinary extent the concept of publishing at the time of the Pre-Budget Report as wide a range of material as the Treasury printing presses can produce. I suspect that this Pre-Budget Report broke all records, although I have not weighed it. Perhaps the Minister could pass on to the Chancellor one suggestion to make to his successor—to produce over a slightly more digestible period the myriad reports that the Treasury now deems necessary for the effective running of the economy, so that noble Lords, the Commission and the country at large can take more note of them.

Baroness Noakes: My Lords, in the corporate world the average tenure of chief executives is five to seven years. The turnover of chief financial officers is even more frequent, at around every three to five years. After that, they tend to run out of ideas and their organisations need to be refreshed. I am sure that the Chancellor thinks that the Prime Minister has run out of steam in his near 10 years in office, but can the Chancellor see that he, too, has run out of ideas and that the Treasury could do with refreshment? Judging from the Chancellor's performance in the Pre-Budget Report, it is clear that he does not see that.
	I wish to outline what we saw and heard in the Pre-Budget Report. My noble friends Lord MacGregor and Lord Northbrook have already made excellent speeches that covered much of the territory that I had planned to discuss, but, since those points were important, I shall make no apologies for repeating some of them. First, we saw the usual boasting about growth in the economy. We are completely used to the Chancellor ignoring the fact that the current run of growth started well before 1997 and not in 1997. We are pretty used to the fact that he relegates inconvenient facts, such as dropping the estimate of growth in 2008, to the small print of the report itself. But we cannot get used to him boasting about growth while the plain fact is that our current growth is at the bottom of the EU. It is below the OECD and world averages. Growth is a relative concept. It is no good growing at a slower rate than the rest of the world. We will become detached—to use the imagery of Polly Toynbee—from the caravan and get left behind if we do not accelerate our growth rate.
	Then we saw the usual fiddling of the figures. Idid not believe the rumours in the press suggesting that the Chancellor would change the golden rule parameters yet again. That is the fourth change, three of them involving the timing of the cycle. But, hey presto, the Chancellor decided that the golden rule meant that the cycle would end in a few months' time, albeit with the smallest of margins. How convenient it was that the NAO was not asked to review this latest change, given its fairly damning comments about the lack of evidence that existed in the Treasury on previous decisions on the timing of the cycle. Even more convenient in the run-up to the next electionis the ability of the Chancellor to rely on a new, hypothetical cycle as well as new estimates of the trend-rated growth. This demonstrates the urgent need for independent oversight of the fiscal rules, as my party has long been advocating. I was pleased to note this afternoon that there appears to be an emerging consensus on that.
	The Chancellor swaggered and fiddled the figures, but he also ignored many of the real issues in the economy. He did not mention that unemployment—at one point 7 million—has been rising faster than anywhere else in the developed world. He certainly did not mention that unemployment in the 16 to 18 year-old range is 40 per cent higher than in 1997. He trumpeted the increase in employment, but the ONS more accurately describes the trend rate in employment as "flat", and any increases are modest compared with the increase in unemployment.
	Behind all these figures is the impact of immigration, a topic already raised by the noble Lord, Lord Newby. The Governor of the Bank of England recently noted the lack of reliable statistics on immigration. It is important to understand the impact of immigration on growth, employment and wage rates, and on demand for public services. I asked the Minister about this in our debate on the gracious Speech, but his reply was merely:
	"The economic impact of migration from the new EU member states has been modest but broadly positive".—[Official Report, 27/11/06; col. 635.]
	At best, that was a partial answer.
	I ask the Minister again to set out what the Government are doing to understand the impact of all forms of immigration on our economy. We believe that we should be seeing the issue of immigration in terms of maximising the net benefit to the UK of GDP per capita, but if we have ropey statistics and an imperfect understanding of the mechanisms at work, we could be storing up trouble for the future.
	The Chancellor ignored unemployment issues. Another issue he ignored was the funding crisis in the NHS, which is having a serious impact on services. What did he say about that? Absolutely nothing. The Chancellor does not understand that pouring money into unreformed public services adds to, rather than solves, problems. He just turns his back on the problem.
	A further issue he ignored is the collapse of private sector pension provision, some of which is attributable directly to his annual £5 billion cash raid since 1997. The savings ratio is nearly one half of that in 1997. What did the Chancellor do in the Pre-Budget Report? He increased the rate of pension credit ahead of the rate of basic pension to ensure that as many old people as possible remained trapped in his prison of means-testing. In the small print he attacked alternatively secured pensions, a matter referred to by my noble friend Lord Northbrook, because they help people who have saved for a secure and prosperous retirement. State dependency coupled with the politics of envy is the hallmark of old-fashioned socialism, and that is what we saw in the Pre-Budget Report.
	Another regular feature of the Chancellor's statements is the re-announcement of past decisions dressed up as new ones. We had a few of those, such as the £1 billion of research moneys that were already available. We also saw his old trick of the apparent promise of new money, not backed up in the small print. This year's big lie, as has already been referred to, is about education. The Chancellor played to his Back-Bench gallery by pretending that there would be an increase in education capital investment. He talked about £36 billion, but, as the devastating analysis of the Institute for Fiscal Studies shows, only £0.1 billion was new money. The increased direct payments to schools, which are a drop in the ocean of educational spending, are for one year only. I was going to ask the Minister how the Chancellor expects head teachers to plan and manage on that basis, but I realised that the Chancellor has absolutely no idea what planning and management in public services is about. That is part of the problem.
	The Chancellor's well worn tricks of borrowing and taxing yet again feature in the Pre-Budget Report. Another £7 billion of borrowing has been added since the Budget, and the tax bill goes up by around £2.2 billion a year. Nearly half of that is the increase in air passenger duty, which, as has been pointed out, is a revenue-raiser rather than a genuine switch to green taxes. The noble Lords, Lord Barnett and Lord Newby, got that absolutely right. The verdict of Ed Matthews, of Friends of the Earth, perhaps says it all:
	"I would give him probably one out of 10 ... I think it's pretty feeble".
	Most of the rest of the tax hikes basically hit business in one way or another. The Chancellor continues to ignore the calls from the business community that our tax rates, once among the most competitive in the world, are now among the least competitive.
	The Chancellor also ignores the fact that his tax and tax credit structures result in more than 2 million people experiencing marginal withdrawal rates of over 60 per cent. A recent Joseph Rowntree report found that work incentives are worse now than they were in 1997, especially for those moving from low-paid or part-time work. The Chancellor has created welfare dependency stretching well beyond the poor. This PBR did nothing to reverse those trends.
	The PBR also did nothing to stop the decline in living standards that a recent report by Capital Economics has shown. All the measures of inflation are rising and are the highest since 1997. Wage increases are now running well behind the inflation experienced by people on low incomes. Pensioners are experiencing cost increases of nearly 9 per cent, which is roughly two and a half times the rate of their pension increase.
	Lastly, the Chancellor said:
	"I have also considered representations for a third fiscal rule which would require us to cut spending by £28 billion this year alone. This is a choice for Britain I reject".
	Will the Minister explain which bizarre third fiscal rule the Chancellor was referring to, and how he calculated the £28 billion? He usually uses the term"a third fiscal rule" to refer to our own policy of prospectively sharing the proceeds of growth. Will the Minister confirm that, if the Chancellor was referring to that, his own figures have expenditure growing by 1.9 per cent in real terms over the period to 2011-12 and that 1.9 per cent growth is less than the growth rate of the economy over that period? Does that not amount to sharing the proceeds of growth, as the Institute for Fiscal Studies concluded?
	I will summarise my charge sheet. The Chancellor brags and fiddles the figures; he ignores the real issues facing the country, and claims more than he actually delivers. The truth is that the Chancellor taxes and borrows a lot, while pouring the proceeds into unreformed public services and the creation of welfare dependency. He then has the cheek to misrepresent our own policies, while following them to the letter. The Treasury certainly needs a new leader—but, equally, our country does not need someone who behaves like the Chancellor in No. 10.
	We are debating the Pre-Budget Report in the context of the annual report that we have to make to the EU on our public finances. As I have often remarked, this is a meaningless report, since we are not part of the euro-zone. The one thing for which I have consistently praised the Chancellor is his ability to keep our membership off the agenda. The noble Lord, Lord Barnett, asked today about the complexity of a referendum on the euro, but it is really very simple; it is a question of yes or no. It is not a question of working out the complexities of the five tests, if indeed they are at root complex. If the noble Lord has difficulties on that yes or no question, I will be happy to help him with the answer when the time comes—if, indeed, it ever does.
	The European Commission's latest economic forecasts are that the UK's structural deficit is larger than that of any other large EU country, including Italy. What is the Government's response? Do they think that it is a largely irrelevant commentary by a not especially relevant body, or that the views of the European Commission on our economy actually matter? If they do, how will we see the Government respond?

Lord McKenzie of Luton: My Lords, the Chancellor is guided by the data on that. On the current assessment it will end in early 2007. Because of particular issues about labour market data, the Treasury needs to see that through to make a final determination. There is nothing wrong in that, as labour market data is quite complex; in some respects—such as on migration—it is problematic, as the noble Baroness, Lady Noakes, pointed out.
	To clarify, by moving the end of the cycle to 2006-07 we would actually miss out two years, which together have an average current surplus, so I do not see how the Government can be accused of seeking to fiddle the figures on that basis.
	As for changing the cycle, when we debated this a year ago, there was, if I may say so, a certain amount of gloating from Members on the opposition Benches about the Chancellor having to reduce the growth forecasts. The extension of the cycle was a consequence of the reduction of the forecast for growth, because it is longer before you get back through trend. If, in fact, growth has been stronger in 2006 than anticipated, it is entirely reasonable that we will get back to trend growth sooner, so the end of the cycle changes.
	The definition of borrowing and the decision whether a PFI project is on- or off-balance sheet are made independently of the Government. The reason for the increase in net debt is that the figures for PFI contracts that should be on-balance sheet are now included in the net debt figures. We debated that issue before and have addressed it. The issue of Network Rail is, if I may say so, an old chestnut. It has been looked at independently and a judgment made that, considering the risks involved, it should not be on the Government's balance sheet. The Government did not make that decision; the ONS and the NAO considered the issue.
	The noble Lord, Lord MacGregor, and others said that taxes, especially business taxes, are too high. Since 1997, the Government have cut the main corporation tax from 33 to 30 per cent, the lowest ever UK rate of corporation tax. The structure of the UK tax system favours jobs and competitiveness. The UK tax-to-GDP ratio is substantially below its peak of 38.8 per cent in the early 1980s, when we had a Conservative Government. Indeed, the recent report from PricewaterhouseCoopers and the World Bank placed the UK very favourably in terms of ease of paying business taxes; and the latest OECD figures for 2004 show that taxes on corporate income in the UK are below the average for the OECD and the EU 15 and EU 25. In terms of the approach to taxation, the proposals for HMRC to improve its relationship and processes with big business, in particular, for clearances, should be widely welcomed.
	The noble Lord, Lord MacGregor, referred to highly leveraged debt and hedge funds. The FSA, the Bank of England and HMT keep an eye on these things and are wary of the risks that they entail, although they bring liquidity to markets and encourage innovation in some respects. Corporate balance sheets are stronger than they have been for a considerable time. If we look at the sector in aggregate, the data show that they are strong. I am pleased that the noble Lord broadly welcomed the Eddington report and the Barker report. My noble friend Lord Peston made the point that we have had lots of these reports before and that nothing much changes. The difference this time is that the strength of the UK economy and the framework in place enable the Government to deal with those issues and take forward those long-term possibilities.
	The noble Lord, Lord MacGregor, mentioned productivity. Although historically, UK productivity has been lower than in other major economies, ONS data show signs of catch-up between the UK and its main industrial competitors. Since 1995, the output-per-worker gap with Germany has closed; the gap with France has roughly halved; and the UK now leads Japan by about 11 percentage points. So progress has been made on productivity.
	My noble friend Lord Barnett asked about the Government's position on the euro. I suspect that he knows that the Government's position has not changed. Our position on membership of the single currency was set out by the Chancellor in his Statement to the House of Commons in October 1997 and again in his Statement on the five tests in June 2003. The determining factor underpinning any government decision on membership of the single currency is the national economic interest and whether the economic case for joining is clear and unambiguous.
	The Chancellor announced in the 2006 Budget that the Government do not propose a euro assessment to be initiated at the time of this Budget, and the Treasury will again review the situation at Budget time next year. The question of what the process and the question would be if we held a referendum is an interesting point, but I suspect that we would not ask people to give their views specifically on the five tests.
	My noble friend Lord Barnett talked about the green budget and the effect of taxes. Are taxes meant to change behaviour or are they meant to raise revenue? One has to look at the Government's approach to climate change as a whole. The climate change levy was introduced at the same time as cuts in national insurance contributions for employers were made, so taxation was switched to something that was bad in an attempt to improve energy efficiency and to relieve costs on employment. That was one example. The Government are involved in a range of processes, such as the emissions trading scheme, the climate change levy to deal with energy efficiency and a range of taxes to seek to change behaviour.
	The noble Lord asked what was happening to assist pensioners with gas and electricity costs. I have nothing on that to hand, but I shall write to him with an early Christmas present. He asked about the Monetary Police Committee (MPC) and the Government's economic objectives. Output and employment are important factors in the MPC's monetary policy decision. The minutes of the MPC, which are published within two weeks of its monthly meetings, show the importance of GDP growth and labour market conditions as factors underpinning the committee's interest rate decisions.
	The noble Lord, Lord Barnett, and others raised issues about the Government's forecasts. We should put that into context. Since 1997, the Treasury, on average, has outperformed the independent consensus in both current-year and year-ahead GDP growth forecasts. In comparison with the previous Administration, this Government have a better record of current-year and year-ahead forecasts.
	The noble Lord asked about trend growth and the reason for the changes. The NAO will audit budget assumptions and has already looked at the change in trend growth and determined that it is reasonable and cautious. The data releases since Budget 2006 relating to inward migration provide new evidence to support an upward revision of the assumed working-age population growth post-2006. That is one of the key features in determining trend growth; others are productivity, hours worked and employment levels.
	The noble Lord, Lord Northbrook, welcomed the Gowers review, the Barker review, with some reservation, and the Leitch report. He specifically asked about the Gershon savings and the reconciliation of the figures. Workforce reduction figures will never precisely match changes to Civil Service figures reported by the ONS, as the two measure different things over different periods and have different coverage. The ONS figures are broadly consistent, showing a reduction in the size of the Civil Service for the past seven consecutive quarters. A technical notice published on the Cabinet Office website explains the difference between the figures. I draw the noble Lord's attention to that.
	The noble Lord suggested that public finances have been deteriorating but borrowing is still projected to fall in each year of the forecast period. The current balance will move into surplus in 2008-09, with the surplus rising to 0.8 per cent of GDP by 2011-12. The Government are meeting their strict fiscal rules over this cycle and are on course to meet the fiscal rules in the next cycle. The noble Lord referred to air passenger duty and asked why it was not introduced when one bought one's ticket. The structure of the tax is that it operates when people fly and there could not be two systems for charging the tax. It was introduced prospectively to operate from February next year. The noble Lord spoke about the change of the cycle, a point with which I have tried to deal.
	The noble Lord, Lord Northbrook, and others raised the issue of alternatively secured pensions. The changes made were entirely consistent with the Government's policy announcement that those provisions were meant to deal with specific circumstances, particularly for those with a religious objection to entering into annuities; so the Government's position and the changes introduced should have come as no surprise.
	The noble Lord, Lord Sheldon, talked about an open letter and asked whether there was a difficulty with that because of the inflation figures. Inflation has risen above target in recent months, driven by increases in energy and food prices. The rise in oil prices since early 2003 is the largest sustained oil price shock in 25 years. Oil prices have tripled since early 2003 and doubled since the beginning of 2004. These effects are, however, expected to be temporary, and oil prices are expected to be lower on average in 2007 than in 2006. The MPC has an excellent record on keeping inflation at or around target. Even if an open letter is triggered, that does not mean that the MPC has failed. The short-term relationship between output and inflation is only imperfectly understood, and monetary policy affects output and inflation with variable lags. As a consequence, inflation may temporarily move outside the thresholds that trigger an open letter.
	The noble Lord, Lord Sheldon, also spoke about the impressive performance of the economy, which is absolutely right, and he reminded us of what the past held. The noble Baroness, Lady Noakes, referred to 57 quarters of growth and said that the Chancellor conveniently forgets that some of those accrued before 1997. That is right but, since 1997, we have avoided the boom and bust of the past—a key feature of the Government's fiscal and monetary framework.
	The noble Lord, Lord Sheldon, mentioned air-passenger duty and asked why we could not have an aircraft tax. The noble Lord, Lord Newby, made the same point. There are difficulties with such a tax, partly because there is a risk that people would simply rearrange their fleets so that the more effective ones operated from UK airports. There are also issues about a tax on emissions that could be outwith our international obligations at the moment. There are already pressures to increase load factors for economic reasons that have nothing particularly to do with emissions.
	The noble Lord, Lord Sheldon, also referred to the current high rate of income tax. He will be aware that we have a manifesto commitment not to change those rates.
	My noble friend Lord Peston talked about the success of the economy as demonstrated by foreign direct investment, and I agree. Indeed, he talked, as I remarked earlier, about a plethora of reports in the past, but there really is a difference now in that the framework in place and the strength of the economy enable us to make progress in those key areas, which we need in any event for the future. He said thatgreen taxes should not be a burden on industry. Indeed, the climate change levy, as I said earlier, was accompanied by a reduction in employers' national insurance contributions, so it is a good example of taxing a bad and relieving tax on a good. He also referred to efficiency gains and inquired how they were calculated. Perhaps I might follow that up with him outside this sitting. Of course I agree with my noble friend that it is as important for the public sector to be efficient as it is for the private sector. He asked about PFI and the risk that not all costs are budgeted for. The process that I outlined a little earlier is that a judgment must be made about where the risk in these contracts lies and whether they should be counted as government expenditure. Until recently, the relevant components of the net debt figures on balance-sheet PFI contracts were not included. They are now, which accounts for some of the changes to the figures before us. The noble Lord commented that the economy is in as good a shape as it has ever been. I agree with that, and with his remark that he hopes it stays that way under the guidance of a Labour Chancellor and a Labour Government.
	The noble Lord, Lord Newby, said what a good idea it was to make the Bank of England independent. I believe that he claimed some credit for that, but I remind him that what has been successful about the economy is not only making the Bank of England independent for monetary-policy reasons but having that sit alongside the fiscal rules—the golden rule and the sustainable investment rule. They work together to ensure that the economy is successful and has sustained good growth, good employment, low inflation and low interest rates.
	The noble Lord, Lord Newby, queried whether the growth projections were a little on the high side and questioned the Treasury's position. I touched onthe Treasury's record earlier. He asked whether the growth in population is affected by migration. The answer is yes. Net migration increases the UK's working-age population, which in turn increases the economy's growth potential. Using working-age population growth as one of the drivers of trend growth projections has long been part of established HMT methodology. The migration projection does not take into account any increase in post-succession migration from A8 and makes no allowance for possible additional migration from Bulgaria and Romania.
	The noble Lord, Lord Newby, suggested that the golden rule was seriously flawed because it could span more than two Governments. But it is an objective economic analysis based on evidence that drives the golden rule—one would hope that if it were to span two Governments, an incoming Government would see the great sense of the rule in operation under this Labour Government. I do not anticipate that happening for a little while, however—I hope not in my lifetime.
	It is not right that there has been an unsustainable surge in spending. The rise in the rate of spending may be moderated, but we are still talking about historically high levels of investment in public services.
	We have talked about air passenger duty and whether that should be a tax on aircraft. The noble Lord, Lord Newby, said that there was a wide range of material and asked whether it could be spread in a more digestible way. All these documents are interlinked and part of a complete story. I would only add that I have to read them all as well for the purposes of this debate.
	The noble Baroness, Lady Noakes, was less than enthusiastic about the Chancellor's performance and was critical in a number of areas. She referred to the usual boasting about growth in the economy. Certainly part of that growth was from before 1997, but this Government have made sure that that growth has been sustained.
	We discussed the timing of the cycle. I said that the NAO would be asked to review this once the final decision was made—when there is a complete picture, particularly of the labour market. We expect the date to be in the current year.
	The noble Baroness said there was a crisis in NHS funding. That is simply not a fair reflection of the position. She talked again about pensions andthe Chancellor's alleged raid on pension funds. The Turner report is very clear on this. The short-term effect of the change in ACT on pension funds was small compared to the effect of wider factors, such as poor stock market performance and the increase in pension liabilities due to rising longevity. We have had that debate before.
	The noble Baroness also talked about taxes hitting business. The latest OECD figures show that taxes on business in the UK are analysed by the OECD as comparing very favourably with our competitors.
	We talked about welfare dependency. The number of people who might be in that category has decreased by about a million from 1997 to date. The noble Baroness asked about how the so-called third fiscal rule will operate and how that interrelates with the Government's projections. That is a matter for the CSR, on which we will have more next year.
	We have had a number of interesting points in this debate. I am sorry if I have not been able to deal with each of them completely in the time available, but there have been quite a number of questions. I will review the record and follow up in writing as appropriate. The Pre-Budget Report drives forward the greater economic mission of our time to meet the global challenge and to unleash the potential ofthe British people, so that the British economy outperforms our competitors and delivers security, prosperity and fairness for all. Having taken long-term decisions to achieve and sustain low inflation and economic stability, we are well placed to face up to the global challenges of the 21st-century economy.

Lord Rooker: My Lords, with the leave of the House, I will repeat a Statement made earlier today in the other place by the Foreign Secretary. The Statement is as follows:
	"With permission, I would like to make a Statement on the European Council held in Brussels last Thursday and Friday. As the House knows, it is customary for my right honourable friend the Prime Minister to make this Statement. I have been asked to convey his apologies, as he is currently on an official visit to the Middle East."There were two main outcomes to this Council. The first, as expected, related to enlargement. The Council endorsed the agreement reached earlier in the week by Foreign Ministers on what action the European Union should take in response to Turkey's failure to implement the Ankara agreement protocol. There was also a wider discussion on enlargement strategy."There had been widespread predictions that the discussion on Turkey at the General Affairs Council would be extremely divisive, would spill over into the European Council itself and might risk derailing the process of Turkish accession: the so-called train-wreck scenario, in other words. But this was avoided. The UK—along with others—made a strong strategic case for Turkish membership, and the train remains very much on the track. Negotiations can move forward on 27 of the 35 chapters of the acquis. And—for the first time in an EU of 25—there is positive language which will be adopted by the Council, in January, on resuming work 'without delay' on a direct trade regulation to end the economic isolation of the Turkish Cypriots."No one is in any doubt that Turkey mustmeet all the requirements and obligations of membership before joining the European Union. But as this House has consistently agreed, a European Union with Turkey as a member will be stronger, richer and more secure. "The conclusions of the European Council further stressed the strategic importance of enlargement more generally—inspiring reform, driving prosperity and competitiveness, and strengthening the EU's weight in the world. Those conclusions reaffirmed that the European Union should keep its commitments towards all the countries that are in the enlargement process, moving forward on the basis of strict conditionality at all stages of the negotiations and judging each country on its own merits."The second focus of the Council was to make progress on the very practical issues that resonate with and matter to the people of Europe and where, through joint action, the European Union can make a positive difference on the ground."On climate change and energy, the Council built on progress made at the informal summit in Lahti. We agreed that the spring Council will discuss options for a global post-2012 agreement on climate change, consistent with the EU's objective of a maximum global temperature increase of two degrees Celsius above pre-industrial levels. And we reiterated the need for a global carbon market and reaffirmed the crucial role and the long-term ambition of the EU Emissions Trading Scheme."The Council called for the priority measures in the Commission's action plan on energy efficiency to be implemented rapidly and endorsed the setting up of a network of energy security correspondents early next year. The spring 2007 European Council is due to adopt a prioritised action plan as part of an integrated approach for a secure, environmentally friendly and competitive energy policy for Europe. And we agreed that European energy and climate change policy will be discussed by the European Council on a regular basis in the future, beginning with an integrated debate on these issues at the spring 2007 meeting."On Africa, we welcomed the progress report on the implementation of the EU strategy, The EU and Africa: Towards a Strategic Partnership, and called for the implementation of the priority actions for next year identified in that report. We also reaffirmed our commitment to working towards a joint EU-Africa strategy to be adapted at the second EU-Africa summit in the latter half of 2007."On the globalisation agenda, we asked the Commission to take a number of concrete steps to further promote innovation within Europe. This included presenting a comprehensive intellectual property rights strategy in the course of 2007; working up proposals for industry-led joint technology initiatives with a view to launching the most advanced ones next year; and, in consultation with relevant stakeholders, coming up with ways in which to improve the working methods and overall resources of the European standardisation bodies. We also agreed to do further work on the idea of a European institute of technology."On justice and home affairs, the Council agreed to consider options for strengthening the framework for decision-making in order to respond effectively to the current changes in the area of freedom, security and justice."On migration, we agreed that we need to strengthen our efforts on the global approach and make sure that we address migration in a comprehensive manner. The Council agreed on the next steps that the EU should take in 2007, including detailed action in three areas with regard to illegal migration: first, strengthening and deepening international co-operation with third countries of origin and transit—for example, doing more to integrate migration issues into aid policies and working more effectively with third countries to combat human trafficking; secondly, strengthening co-operation among member states—for example, intensifying measures against illegal employment and developing identification technology at borders; and, thirdly, improving the management of the European Union's external border—for example, finding sustainable and effective ways to announce the capacity of FRONTEX. The Council also agreed to have a common European asylum system in place by the end of 2010, starting next year with a preliminary evaluation of its first phase."The Council issued separate declarations on Lebanon, Afghanistan, Iran and African issues. On the Middle East peace process, the European Council set out how it would engage with a legitimate Palestinian Government that adopted a platform reflecting the quartet principles."The European Council quite rightly concentrated on those areas, not least enlargement, where the European Union can make a real difference to the lives of people in Europe. The progress that we made at the Council and, perhaps just as important, the dangers that we avoided demonstrate again the benefit of having a UK Government with not just a clear strategy on Europe, but a strong influence based on consistent and close engagement to see that strategy through. I commend the outcome to the House".My Lords, that concludes the Statement.

Lord Howell of Guildford: My Lords, I am sure that we all welcome the Statement repeated by the noble Lord, Lord Rooker, who thereby extends his already vast brief in other areas to the finer points of European politics. I am sure that he has picked up all these matters speedily, because it is not a big subject.
	It was a curious event that took place at the end of last week, because it received amazingly little coverage in the press. One is tempted to think that that must have been because it was a non-event. But past experience teaches us that on just such occasions big decisions get slipped through and sensitive matters such as the loss of veto powers get agreed, or some other agreement gets bypassed, surrendered or slipped through. So we need to watch carefully the small print, as at all other meetings. Let me just comment on a few of the salient issues.
	First, on Turkey and enlargement generally, of course we are glad to hear that the Turkish membership issue remains "on the track". Does that mean that the full range of negotiations can be resumed? How is this going to be done? What steps will be taken to persuade the Greek Cypriot Government in Nicosia, who have so far proved themselves to be totally intransigent, blocking progress at every point, to lift their blocking policy on the inclusion of Turkish Cyprus in the EU? Many people thought that the EU member states had promised that that would happen when Cyprus was admitted to the European Union, but it has not. Are the Government aware of how rapidly Turkish opinion is turning away from the European Union altogether? Are they also aware of the very dangerous implications for all our futures if that is allowed to happen, and the strategic defeat that it would impose on the West? We are glad to hear that there is progress and that Turkey is back on track, as it were, but there are some very high hurdles to jump before we can be reassured.
	Secondly, although I have said that I want to talk about salient points, there is one point that was not salient at all in that it was not even mentioned—the European constitution. This really was the missing guest at the party. It seems barely credible that this issue, which has been vigorously debated in several European capitals these last few weeks and much aired in the press, was apparently not discussed at Brussels at all. But there was no mention of it in the Statement. Has a new timetable been agreed for a new constitutional document, as has been widely reported? What will it include? Will it again propose a full-time President and a full-time Foreign Minister of the European Union, as well as a host of other proposals that were in the failed previous constitution? In fact, will it be another "constitution" at all, given that the word caused so many people a degree of indigestion? If it does have constitutional implications, and big ones, will Her Majesty's Government give this country a referendum on it, as they were prepared to do last time? We need some reassurance; it is very odd that the issue does not get a mention in the Statement.
	Another central issue in everyone's thinking is climate change and carbon emissions. Of course we are glad to hear that there is a post-2012 agreement in the making and we hope that this has a cutting edge to it. Was it noted at the meeting in Brussels that emissions growth in the United States, which is often criticised and did not even accept the Kyoto Protocol targets, has been notably less in percentage terms in the past five years than has been the case in the European Union? Is there something basically wrong with the EU approach, and can we be assured that a new emissions trading scheme will work a lot better than the current one, which has made very little contribution—indeed, some argue that it has made things very much worse? Incidentally, what exactlyis a network of energy correspondents, as was mentioned in the Statement? What will they do? It would be interesting for me to hear—others may know the answer, but I do not.
	On the issue that is on everyone's mind—the quagmire of the Middle East—the Statement tells us what the EU would like to do if only there was a Palestinian Government who would reflect the quartet principles. If only—the problem is that there is no such united position. I wonder whether the Ministers assembled in Brussels had anything to say or any wisdom to add about the hideous internecine fighting in the Gaza area—and, I am afraid, elsewhere—between Al Fatah and Hamas and the growing signs of division and civil war, which mean that the prospect of a Palestinian Government who could negotiate or join in the quartet road map procedures is even more remote than it was before.
	The Statement rightly argues that the need is for a European structure that makes a real and positive difference to all our lives. The biggest difference of all would be to set the European Union on a path towards flexibility, an end to over-centralisation and a modern adjustment to the requirements of a networked world. That is what is needed. Did Her Majesty's Government give a strong lead in that direction? Frankly, there is not much sign of it in the Statement.

Lord Rooker: My Lords, I am grateful for the questions and for their tone. I shall do my best to answer some of them. If I miss anything out, no doubt a letter will wing its way to me. I had a personal briefing in the locker room of the gym this morning by the Minister for Europe. He had been at the Foreign Ministers Council earlier in the week. It was extremely helpful to me, I freely admit.
	On the latter point made by the noble Lord, Lord Wallace of Saltaire, I do not know whether I will have a name to give him before I sit down, but the Government have been committed to engaging with the public on the issue of Europe. I know it is not easy to increase awareness about the European Union and the fact that it continues to reform and deliver for its citizens. The noble Lord, Lord Howell, said that there had been little coverage in the press and, rightly, that you have to read the small print. That is a fair point, but I am not aware that anything is buried in this text. I do not think that is what he was suggesting, but you certainly have to read it a second time. There has not been a lot of coverage in the press.
	I am grateful for what both noble Lords said about Turkey. The noble Lord, Lord Howell, asked me about the Greek Cypriots. That is a contentious issue, but we welcome the positive reaction from both sides to proposals put forward by the UN Under-Secretary-General in mid-November to implement the July agreement aimed at the resumption of substantive negotiations leading to a comprehensive and durable settlement. We support that route to a solution.
	The noble Lord also mentioned Turkish public opinion turning away from the EU. However, from all that I have read, and as has been noted in this House, there have been remarkable changes in many areas in Turkey during the process of trying to join the European Union. I accept that there is still a long way to go, but there have been substantial changes in how society is organised and in the economy that have benefited the people of Turkey.
	On the European Union constitution, I understand that the term is that we are in a "reflective period". In answer to the noble Lord's substantive question, during the six months of the German presidency from 1 January, they will consult member states and report back to the Council at the end of that period. They will discuss with all 27 member states where we are with the constitution, and I cannot forecast what the result will be. It is not as though the matter was not discussed; it is generally accepted that the Germans will undertake that consultation. The Government's commitment to the referendum continues; there is no backtracking on that.
	On energy correspondence, it may simply be a grand description and I do not wish to denigrate the people involved but it is a network of senior officials appointed to drive forward the project, so no new institution is created.
	We welcome the ongoing evolution of thinking for a European Institute of Technology, which the noble Lord, Lord Wallace of Saltaire, asked about. But—this is where the noble Lord was sceptical—it is important that we get the design right so that it can contribute to Europe's innovation record. The view of the UK Government is that the European Institute of Technology must add value, be distinct from existing instruments and assist creating incentives for business research and academic involvement.
	We do not need to apologise on climate change. The European Union has a role to give a lead and the UK will play a central role in ensuring that the EU continues to demonstrate our commitment to tackling the issues. I am not in a position to get down to whether America has cut its emissions to a greater or lesser extent. Obviously there have been substantial changes in America since Kyoto because some of the states of the United States have taken a more proactive green stance than ever was the case before; clearly that is the case in California. So there is a key role, and there is no doubt that we have a good record in emissions trading and our recent proposals. I understand that we are the only country whose programme satisfied Brussels. All the others were sent back to look at how they are going to operate. We need not be mealy-mouthed about that.
	The noble Lord said that the western Balkans were on track for enlargement. There were general discussions about enlargement. We want to push the principle of enlargement, not just in relation to Turkey, although that is a substantial part of the discussion. The UK remains committed to EU enlargement for the western Balkans. The only viable solution to the region's difficult past is a European one. We welcome the Commission's recent progress reports on the Balkans. They are a useful tool for the western Balkans to focus their efforts on the priorities for reform, so I hope that that is a positive response.
	I am reluctant to talk about the Middle East because it requires more considered responses and cannot be dealt with off the top of one's head. We are committed to the road map. I cannot go beyond the statements published from the European Council and that which the Foreign Secretary made in the other place. I do not see why anyone should be upset or take a misleading view, as implied in the noble Lord's reference to the common asylum system. Most ordinary people would say that it was about time that we had a common asylum system so that one country was not played off against another, but that need not raise horror headlines. We are trying to get our house in order in a very difficult area of policy, where it has not been done before.

Lord Teverson: My Lords, may I press the Minister further on climate change, particularly the emissions trading system? I very much welcome the communiqué's concentration on climate change and the fact that there will be a major strategic discussion next spring that will, I hope, lead to real action over the long term. However, we can sometimes be too pessimistic about the emissions trading system. First, a huge amount of carbon trading has taken place since the scheme was introduced and, although it has many flaws, the current system is a financial market that works and has an important operating base in the United Kingdom. We can already show that climate change management can start to work through market mechanisms. We should not underestimate its success so far.
	Having said that, the system is now entering a phase—leading up to 2012—that will decide its success. For the moment, much is needed to ensure that the system works effectively between now and 2012 in terms of allocations among industries and which industries are included. What practical conversations have there been between heads of Government in this key area to ensure that the 2008 to 20012 period for the emissions trading system works effectively, so that it can be one of the major global tools for climate control, given that one in five of the world's carbon emissions comes from the European Union? The amount is, admittedly, smaller than that of China, but we are still a major player globally.

Lord Rooker: My Lords, the noble Lord is quite right. I agree with him that we should not be apologetic about starting the emission trading system. A price has already been put on the product. It is early days and there will be changes. I do not know whether it was discussed in more detail than I indicated in the Statement, but the fact is that we are working with the Commission to encourage a strengthening of the European emission trading system.
	The EU heads agreed that climate change and energy should be considered together. The energy policy contains many of the levers that we want for a transition to a low carbon economy. Good progress has been made on climate change and energy security under the Finnish presidency. The German presidency will start in January. Germany has announced upfront that climate change will be a key feature of its presidency.
	We look forward to a spring European Council, which is likely to have a strong focus on climate change and energy issues. We will play a central role in ensuring that the EU continues to demonstrate its commitment to tackling these issues. We need to make some changes to policy; and to be ambitious and not mealy-mouthed about it. The emissions trading system will probably require some changes. But the fact is that once the Governments have set a price on the market, the market will perform. I hope that in future that can work as well as it does in other areas.

Lord Stoddart of Swindon: My Lords, I am afraid that I am going to break the consensus of the admission of Turkey. I believe that Turkey is not a European country. Indeed, by the time it is admitted its population will be 90 million, the largest population in the European Union and it will be dominant. I imagine that I am in a minority on that issue.
	What is meant by "justice and home affairs"? Does it mean that the Government are about to give up the veto on all matters relating to justice and home affairs? What is the latest situation on that?
	As regards asylum, there is a United Nations policy on that. How will any agreement by the European Union affect the United Nations policy? Perhaps the Minister could remind me whether the decisions be taken by QMV or unanimity.
	Finally, I note this declaration at the end of paragraph 3:
	"The European Council reaffirms the importance of commemorating the 50th anniversary of the Treaties of Rome in order to confirm the values of the European integration process".
	I had understood that Her Majesty's Government were in favour of the European Union being an organisation of nation states co-operating together, not a process of integration. That is bound to lead eventually to a European superstate, or a country called Europe. I really would like to know the Government's policy on that, and the Opposition's for that matter.